Businesses exist to make a profit. And price is a key component in profitability. Regarding businesses in the for-profit sector, it has long been said, “If there is no margin (no profit), there is no mission.” While other goals may exist, creating and sustaining profitability is critically important.
- If the business doesn’t make enough profit, it can’t survive long term. (Sure, there are exceptions, like Amazon, founded in 1994, traded publicly in 1997, and didn’t turn a profit until 2001. Those exceptions are very few.)
- Profit is a reward for the risk taken in the business. It is the return on investment, expected by shareholders and invested financial institutions, impacting stock prices, and the future ability to borrow money.
- Profit compensates owners and employees.
- Profit creates inducement to innovate and to generate more employment.
- Profit is a measure of the efficiency of the business and the effectiveness of its management.
- Profit generates funds to pay down debt and provides reserves to meet future uncertainties.
- Profit generates funds to increase the volume of business through expansion, as well as to increase the market value of a company.
B2B versus B2C Pricing
When you watch TV, drive past a billboard or check your mobile news feed, it seems like everything is on sale—cars, hotels, restaurant meals, apparel, grocery items, you name it. So, low price appears important to consumer buyers, but what is the role of price in the B2B arena? Is low price the best (or only) answer for B2B buyers?
Consumer buyers are often looking for the best price at some generally expected quality level, hence the consumer marketing emphasis on low price. Business buyers, however, are usually more sophisticated and want to buy products or services to help their company be competitive, profitable, and successful. How B2B buying characteristics vary:
- A decision-making process that’s more complex than consumer buying.
For example, purchasing managers want the best price. Production managers want to ensure high volume throughput. Health and safety managers want to ensure low risk.
- B2B purchasers are more “rational” in their buying compared to consumer purchasers who tend to involve more emotion in their purchasing. B2B purchasers need to be more informed and more accountable for purchasing decisions. Needs have defined quantities, delivery times and specific service terms. Because a business’s reputation and even existence are at stake, quality and reliability are crucial.
- B2B purchasers are longer-term buyers. So, relationships, trust, and services are critical.
- B2B products are generally more complex, so information is key to those buyers.
Why Do Businesses Buy a Particular Solution?
Businesses buy for the following reasons including, but clearly beyond the sole factor of price:
- Products or services. Their functions, benefits, quality, and reliability.
- Your reputation, what you stand for, and trustworthiness. How well you differentiate what you offer.
- Excellent customer experience. Are transactions with your business are easy, safe, secure, and dependable?
- Customer relationship. How you treat them and make them feel. How you respond to their needs and concerns.
- The price for products or services based on their specifications.
- The value they receive for what they buy.
Quality. A Central Component
Quality is a central component of B2B purchasing decisions. Quality is defined as:
- Fit for purpose. The product or service is designed to do exactly what you want it to do. For example, if a machine is supposed to produce a product at a certain speed, with limited output defects, and with defined durability, that is a quality machine.
- Meets requirements. The product or service exactly meets the purchase specifications.
- Meets standards. The product or service meets the established processes and industry standards.
- Meets service expectations. The experience provided in the buying process casts a strong “halo” over the other physical attributes of product or service buying.
Value in the Purchasing Equation
Value relates to the overall quality of the product or service itself and the purchasing environment as compared to the price involved. Thus, for example, there can be great value in purchasing a high-priced jet or a low-priced hamburger.
Correct pricing is critical for every business. Price too low, and you risk diminishing your brand, leaving money on the table, and constantly fighting in the low price “street.” Price too high, and you can miss or lose customers. The optimal price is influenced by many variables, including competition, the economic environment, perceived value, and even emotional factors.
Three general pricing strategies are commonly applied in B2B pricing:
- Cost-plus pricing. This simply applies a standard margin to every product for every customer. It is an easy mathematical method but does not maximize profits.
- Competitive pricing. This approach essentially looks at competitors’ prices and models your prices accordingly. This neither distinguishes nor enhances a brand and doesn’t maximize the other factors involved in purchase decisions.
- Value-based pricing. This is a more complicated strategy that places a focus on your customers’ needs relative to what your business provides for them. It brings into play all the purchasing considerations in an optimal way.
Proven Price Strategies
According to a report by McKinsey & Company, “The Hidden Power of Pricing: How B2B Companies Can Unlock Profit,” there are four proven price strategies:
Margin Expanders. This applies particularly to companies in mature markets where there is heavy competition. In this instance, companies can incrementally expand margins and thereby profits through incremental changes to the existing price structure, such as:
- Differentiating pricing by product or by customer.
- Raising or lowering prices based on competitive dynamics.
Revenue Drivers. This approach involves increasing revenue through incremental changes to pricing structure to penetrate deeper into the existing customer base, including:
- Pricing new or different elements.
- Changing how the offering is bought or paid to increase the spend per customer.
Pricing Disruptors. This “radical approach” is for companies in new categories or categories under significant threat. It attempts to maximize profitability by redefining the pricing structure. Specifically:
- Redefining how or what you price.
- Sharing profits with customers.
- Applying innovative technology or tools to identify or capture more value.
Sales and Pricing Pioneers. This “radical approach” aims to gain scale by drastically redefining pricing. For example:
- Charging for results/performance.
- Mixing free and paid elements.
- So-called “flexible” pricing which gives the customer the power to decide prices.
McKinsey suggests that data use is key to effective pricing actions:
- Provide meaningful pricing data for pricing managers to make good decisions.
- Make the necessary effort to research and understand what customers truly value. Understand the key buying factors that determine how much a product or service is worth to the customer.
5 Pricing Pillars to Optimize Profitability
A paper titled, “Optimizing B2B Pricing-One of the Greatest Levers on Profitability,” written by Aubry Pierre and Remy Ossmann, offers a pricing framework consisting of 5 pillars.
Pillar 1: Identify the product or service attributes that increase the total value perceived by the customer. Essentially, what do they value, and how much do they value it?
Pillar 2: Build a price structure that is not a “one-size-fits-all” approach, but rather meets the circumstances and needs of each buyer, based on the value of each product or service to be sold.
Pillar 3: Communicate the value proposition offered clearly and its corresponding price.
Pillar 4: Manage discounts completely separate from the price structure so that discounting is properly disciplined and pricing steered.
Pillar 5: Execute pricing carefully through contract management.
Avoid Pricing Mistakes to Optimize Profitability
- Don’t use a “set it and forget it” pricing approach. Rather, continually examine, test, and re-evaluate a pricing structure and process.
- Don’t fail to experiment with product or service pricing.
- Make sure to understand each purchasing situation as a separate “persona.”
- Don’t charge based on the wrong criteria.
- Don’t provide too many or even too few pricing options.
- Don’t offer unnecessary or unwarranted discounts. Replace the urge to discount by improving customer support and delivering on superior quality.
Reasons B2B Buyers Will Pay More
Coming full circle- businesses who optimize business profitability and take into consideration all purchasing motivations will find their customers are willing to pay more and actually buy more. Businesses will pay more if:
- Your product or service has “must-have” or distinguishing features.
- Your product or service is easier to buy.
- Your product or service is delivered more quickly.
- Your product or service enhances the buyer’s reputation.
- Your customer service is more friendly, more attentive, more helpful, and responsive.
- Your customer likes and trusts you and your representatives.
These are considerations when you create and work your revenue development action plan. A good next step is to determine whether the organization is on track to succeed and how to course correct in response if it is not. The company should stop doing anything that is not creating SMART (Sustainable, Measurable, Achievable, Repeatable, on Target) revenue and begin doing more of what is driving desirable revenue. These deviations can be small ongoing changes or major strategic shifts, but they should all work together to align ongoing operations with long-term goals.
Remember, planning for success is an ongoing process that goes beyond pricing.