Learn what a B2B pricing strategy is, why many go-to pricing strategies are ineffective, and how modern, software-enabled pricing strategies greatly benefit B2B companies in an era of unprecedented market volatility and inflation.
Pricing Is the Most Effective Profitability Lever
“74% of CFOs cite lower profitability as the biggest risk organizations face as a result of input price inflation. In response to input price inflation, most executive leaders are taking near-term actions. Few firms are instituting long-term changes that could create a competitive edge,” states Gartner’s 3 Ways to Mitigate Margin Pressure From Input Price Inflation report.
The fact that pricing is the most effective lever for profitability and margin growth is well established. In an era marked by unprecedented market volatility and inflation, B2B companies need to ensure that their pricing strategies accurately reflect real-time market conditions. Additionally, the growth of digital or hybrid selling, eCommerce, and self-service portals has hastened the need for market-aligned and consistent pricing across all channels.
There are many different pricing strategies that companies can implement. More traditional, do-it-yourself pricing strategies, such as cost-plus and value-based pricing, are often executed with manual processes.
While these methods have been effective in the past, many companies are coming to the realization that these processes aren’t able to keep pace with the frequency of market triggers that necessitate a price adjustment. Many of these companies are embracing modern, technology-driven pricing strategies with the aid of pricing software to become much more efficient and strategic.
Read More: Pricing Software: What is It and How it Works
In this explainer, we’ll explore both manual and software-driven pricing strategies, including why they do or do not work for complex B2B businesses and how well they are suited to tackle current economic trends. But first, let’s define a B2B pricing strategy.
What is a B2B Pricing Strategy?
A B2B pricing strategy should be comprised of many granular strategies for gaining margin, gaining market share, and fending off competition in a manner that is aligned with customer price expectations, consistent across all commercial channels, agile enough to be updated in real time, transparent for sales team consumption, and meets a business’ P&L goals.
At its core, a pricing strategy needs to consider the following:
- What are your margin and revenue goals?
- Who are you selling to?
- What are you selling and at what volume?
- What is your value proposition?
- What channels do you sell through?
- Who owns pricing decisions?
- What are your competitors’ pricing strategies?
- How is price expressed: List, customer-specific, matrix, spot/negotiated, a mixture of all?
- Where and how is data sourced and utilized?
HubSpot offers a succinct definition:
“A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.”
Building from this definition, it’s imperative that each price point is aligned to customer relationships, competitive dynamics, regional differences, current costs, product value, and more.
Customers in self-service channels like eCommerce should find pricing to be aligned with these dynamics without the need for sales rep intervention. At the same time, B2B pricing is commonly negotiated. Sales teams need market-aligned pricing that’s transparent as to how prices were derived and why price changes are necessary. Whether a customer is on a self-service digital channel, buying from a sales rep, working with inside sales, or buying from any other channel, pricing must be consistent at each touchpoint.
These dynamics have challenged companies to rethink traditional pricing strategies and approaches, which have largely been relegated to a labyrinth of spreadsheets, emails, and inflexible pricing systems of record.
What Are Some Examples of Common Pricing Strategies?
From our experience, we’ve seen companies use several traditional, do-it-yourself pricing strategies to set prices. Some of these strategies include:
- Cost-Plus Pricing: Adding a certain amount, such as a specific markup, to a product’s cost to determine price.
- List-Minus Pricing: A discount from the list price that’s typically expressed as a percentage discount resulting in a net price.
- Value-Based Pricing: The concept that there is intrinsic value being offered that’s not directly captured in a product’s underlying cost or list price. A value-based pricing strategy seeks to identify and quantify those drivers of value.
Learn More: Inflation Value-Based Pricing and Trucking
How Do Common Pricing Strategies Create Challenges for B2B Businesses?
The most pressing problem with these common, do-it-yourself pricing strategies is that they are not able to account for all factors that drive price response in the market. Many complex factors are at play when considering price for a complex B2B company. These include market demand, customer relationships, economic landscape, price elasticity, supply and inventory, and competition to name a few.
Go-to, manually driven pricing strategies are overly broad, and as a result, can’t account for the complex dynamics outlined above. This can, unfortunately, lead to problematic behavior from sales reps. Over time, sales reps lose confidence in pricing and revert rule-of-thumb or intuition-based pricing.
When that happens, there are two possible, risk-driven outcomes: 1) the sales rep sells at a higher price to increase their commission at the risk that the customer may take their business elsewhere, or 2) the sales rep may over-discount and offer a lower price to secure the customer, which results in money left on the table.
Finally, traditional pricing strategies are typically executed using cumbersome manual processes. This means tracking and updating spreadsheets, communicating via email, and deciphering complex reports. All these processes are time-consuming and are far too slow to meet today’s challenges, such as inflation and market volatility. In an era of frequent cost changes, enacting a price change needs to be done with speed and precision. Otherwise, lost margin is the most probable outcome.
What Are Some Examples of Modern B2B Pricing Strategies?
Modern pricing strategies can be better executed with end-to-end pricing software. Pricing software affords complex B2B businesses the ability to process large amounts of data quickly, automate processes, and more effectively optimize or manage prices. Price Optimization and Price Management software are the two most prominent tools used today to enable modern pricing strategies.