The five biggest myths of B2B pricing

May 31, 2016

The five biggest myths of B2B pricing

1. "The market sets the price. We can’t deviate from that"

There is no such thing as a market price! No two transactions are the same. Every customer is different, along with their willingness to pay. Similarly, every order is different, and so are the order volumes and delivery requirements. This means there’s a transaction price for every individual situation, but definitely no market price. The notion that you cannot differentiate prices because you would deviate from the market price is far from the truth. Defining value drivers, such as customer potential, volume or delivery time, and using them to differentiate prices, are simple examples of how this can be done.

 

2. "The competition always undercuts our prices. We have to follow and match them"

This is the recipe for a price war. Simon-Kucher’s global pricing study shows that 88% of the companies who are involved in a price war blame “the Others” for instigating it. Regardless of who started it, one thing is clear: the only winner in a price war is the consumer. The solution is to act based on the idea of live and let live. Companies involved in price wars have to understand the concept of deserved market share. It means that if you fight for more than your deserved market share, you will end up in a price war. Nobody reaches 100% market share without destroying margins in the industry. The threshold is not 100%, but maybe rather 20%, 30% or 40%, depending on your competitive advantages in a specific market segment. Whether you started the price war or not, you should definitely be the first one to stop it.

 

3. "Pricing methods might work in B2C, but not B2B"

The typical large scale customer survey won’t work in B2B because clients quickly catch on to the real reason behind the questionnaire and start answering strategically. However, there are pricing methods that do work in B2B very well. Incorporated in selective client interviews and extensive data analysis, pricing methods are very powerful and reveal substantial profit potential for B2B companies. The key with client interviews is to have a discussion based on value instead of price. If you know what you are looking for, a transaction data analysis can lead to stunning discoveries. Drawing the right conclusions with the right adjustments in pricing leads to real profit improvements.

 

4. "Our sales reps know exactly what they can charge"

For the best, very experienced, grey-haired sales representative, this is often true. They typically have a very good sense of what an appropriate price is in a specific situation. However, how many of these sales reps do you have? The large majority of sales reps are not well equipped with hundreds or thousands of price reference points from closed transactions in the past. They base their price decisions on gut-feeling. Thus, a structured price setting logic based on objective value drivers is necessary. Embedded in an easy-to-use pricing tool, this makes it less complicated for the sales reps to find the profit-optimal price for each transaction.

 

5. "We don’t have any issues. We have pricing fully under control"

One simple question: Do you monitor and steer your prices as accurately as your costs? We have never seen a company that has tracked and optimized their price quality over the last decades in the same way they did with costs, even though price has a bigger impact on profit. Huge deviations in prices for C-customers with low potential or rounding discounts in 5% steps are just two simple examples where companies leave money on the table. Pricing is, like costs, not just a one-time optimization effort but rather a constant process. Creating transparency with transaction prices is the first step in that process. Continuously steering margins is the second.

 

Takeaways:

  1. Accept the fact that there is no market price, but individual transaction prices
  2. Define your deserved market share and act on it – you can’t win a price war
  3. Identify and optimize profits with proven pricing methods in B2B
  4. Move from gut-feeling to a structured and tool-based price setting process
  5. Manage your prices like you manage your costs