Shipra Biswas Bhattacharyya is a Partner at Kearney
Business-to-business (B2B) organisations, driven by seemingly unique business dynamics, have long grappled with setting the right prices, often believing pricing is too complicated or too sensitive of an area to play with. Invariably, pricing often gets pushed down the list on C-suite agendas, falling below other strategic initiatives such as volume growth and cost reduction. However, if correctly deployed, few initiatives have the power to impact both the top and bottom lines as much as pricing, with the potential to improve gross profits by an average of 15 percent —and there is always more to gain.
One of the first steps in creating value through pricing is to question the entrenched beliefs and debunk these age-old myths. Three misperceptions are common:
Myth #1: Beyond a limited premium for product quality, the market determines the price There is an inherent notion that B2C consumers are more emotional, while B2B buyers tend to be tough bargainers, driving prices down. Amid aggressive competition, the only realistic price premium is for a better-quality product, and for commoditised products, the market completely controls the price.
Reality- The rational nature of B2B buyers is a blessing in disguise. Pricing can be improved by communicating the incremental value to the customers. More importantly, the sources of value are not limited to the product alone. A range of factors across the seller–market–buyer ecosystem can extract better pricing. In fact, this is what creates a “price band” in the market, which the leaders exploit, even for commoditised products.
Myth #2: Every B2B transaction is unique, so it is impossible to define a standardised approach to pricing
Most B2B organisations have fewer transactions with higher value than a B2C organisation of a similar size. Every situation and every customer order is unique. The buying process is more complex, with an array of stakeholders from decision makers and influencers to end users. It also involves a varied set of time-consuming processes, such as requests for proposals that have defined evaluation steps and criteria. Any attempt to structure pricing for B2B transactions will therefore be impractical or too complicated.
Reality- Dealing with B2B companies regularly will reveal that despite the perceived uniqueness of individual transactions, it is practical and rewarding to adopt a standard pricing structure that captures the complexity. The complexity can be broken down into variations in the factors (price drivers) across the seller–market–buyer ecosystem, making it possible to create a standard approach that is relatively easy to understand and execute. The intricate analysis can thus be bundled into a simple solution.
Myth #3: A standard pricing system is a guaranteed recipe for lost volume
The core strength of a B2B sales organisation is having a sales force that can extract the best price by capitalising on their experience in the field. A standard pricing system takes away their flexibility to tailor pricing to a specific situation, which in turn can prolong the negotiation and closure cycle, eventually leading to lost orders.
Reality- A well-designed pricing structure hits the sweet spot—providing customised target prices for salespeople to play with. The system ensures that decisions are driven by information and logic while also limiting self-serving behavior, such as pricing that is too low to close an order. Flexibility is retained in the form of “informed flexibility”, with management maintaining adequate pricing control. Of course, for this to work seamlessly, the escalation process and the supporting organisation must be designed with the right balance of agility and control.
Bursting these above bubbles will help reinstate pricing as a strategic area of executive focus
Pricing is at the heart of every organisation—a quintessential element of the annual planning process and a vital tool for translating business objectives into action. The Price Balance approach can deliver a significant impact on the price realisation for B2B companies to drive organisational value and translate business objectives into action. Forward-thinking companies must keep pricing at the top of their C-suite agendas. The ideal pricing is determined by both price setting and price getting, basis variations on ten key factors across the seller-market-buyer ecosystem.
It’s not as risky as people think – organisations tend to under-estimate the benefits of scientific pricing and over-estimate the risks (biggest being volume loss). The key to mitigate risks is to set up the right systems, while being nimble at responding to changes. It needs to be adequately enabled through process changes and organisational support as well as regular reporting, and reviewing, thus creating a positive feedback loop that leads to operational improvements across the sales organisation.
There is a lot to gain from pricing. Scientific pricing is no longer a theoretical concept and within reach today for most as data unavailability is no longer an excuse. Implementation is not as difficult as earlier, with higher availability of market data through aggregators and specialised pricing tools. Organisations of today need to build a higher appetite for risk and test different models to see what can maximise value for them. An interesting concept is that of “pretotyping” – essentially running small experiments with dummy offerings and learning from the results to improve on design – something that is quite amenable to pricing as well.
In summary, B2B organisations will need to be bolder about adoption of a balanced pricing approach. Executives will need to keep pricing at the top of their agendas – at par (if not higher) with growth and cost reduction. Experiment, fail fast and improve should be the mantra going forward.
The author is a Principal at A.T. Kearney India.