Successful pricing strategies strike the right balance between the value attributed to a product or service by the buyer and the seller. Rideshare companies like Uber and Lyft have found this balance with their dynamic pricing models that fluctuate with demand. Each Saturday night, a safe drive home is perceived as more valuable than a ride after work on a Tuesday.
These kinds of price movements are commonplace for business-to-consumer organizations. Professional sports teams have adopted plans that adjust pricing depending on the matchup. Games against marquee teams are often far more expensive than a game against lesser opponents.
The law of averages makes this possible. B2C companies, unlike their business-to-business counterparts, are targeting a significantly larger audience with relationships that come and go and come back again.
B2B enterprises, on the other hand, feel compelled to maintain and optimize pricing levels for a number of reasons. Sales cycles are longer. Relationships are built over time, making customer retention essential. Purchases are based on rational business decisions rather than emotional impulses. Even price points are generally much higher.
Differences cannot drown out one important fact, however: B2C and B2B businesses both strive to maximize profit and drive value to the bottom line. It’s as simple as that. The good thing is B2B and B2C operations are not mutually exclusive. In our experience, the B2C pricing environment can help B2B pricing strategists better understand their own business and optimize pricing for increased profitability.
Visiting the grocery store in San Francisco is a vastly different experience from shopping for groceries in Plano, Texas. There are products available in San Francisco that cannot be found in Plano, and vice versa. Not to mention that price points in San Francisco are higher for the most part. Groceries have varying product mixes and price points even within similar metropolitan areas.
It all depends on data. San Francisco and Plano have drastically different demographics and income averages. National grocery chains recognize this and adapt.
For B2B enterprises, ignoring segmentation as a pricing strategy can damage profitability, especially for organizations with a global footprint. We have worked with businesses operating in more than one hundred countries with tens of thousands of customers and a comparable amount of unique SKUs. A one-size-fits-all approach leads to troublesome gaps in profitability.
B2B companies must leverage their data to better understand customer behavior by segmenting by region, industry, customer size, transaction type, and product line. Are customers in EMEA purchasing more than those in North America? Does a certain product perform better via channel or direct?
B2C companies have been segmenting by demographic and income rate for a while now. It’s time for B2B organizations to recognize that segmenting pricing at the industry, region, or product level provides a more accurate view of a customer’s willingness to pay.
National B2C companies in the U.S. have roughly 300 million potential customers. Changing prices — up or down — can have a massive impact on profits and market share. Regardless of which way the prices go, the law of averages leads to a relatively smooth elasticity curve.
B2B companies don’t have it as easy. There are fewer customers, and even fewer prospects. Lowering prices in the B2B environment, unlike in the B2C market, will not have the same luring effect of bringing new clients.
However, in many cases, the B2B buyer has to continue purchasing because the product is required for their own business to operate. A firm can measure the impact of a price change by implementing price optimization into its pricing strategy. What is going to happen when prices change? Are customers going to defect? B2B leaders need to shift their focus away from volume and more towards win-rate elasticity, which shows profitability at the transaction level.
With price optimization, a company is able to identify target prices at the deal level to ensure the sales team is winning deals at the highest level of profitability. Only then can executive management understand the true impact of a price change.
If you’ve ever bought something online, you have no doubt seen the cross-sell opportunities in the “Customers Also Purchased” sections. B2C companies use internal, historical transaction data to provide add-on offerings to consumer purchases.
With the added visibility from segmentation and win-rate elasticity, B2B enterprises can leverage similar internal transaction analytics that speak to customer behavior. By marrying this data with competitive intelligence data, a company can have a comprehensive look at customers’ needs and options.
As we said above, B2B customers are often buying out of necessity, not impulse. Like the average consumer, however, they want to simplify their buying behavior to be efficient and cost effective. If you notice they are looking elsewhere for a supplemental part that adds value to your own product, fill the gap.
This is a perfect opportunity for advanced collaboration within the organization. Give recommendations to sales representatives and product managers to be passed on to the customer base. Since these positions have experience with customers, they can see cross sell-potential for their product line that helps increase revenue. Working with colleagues to set optimized prices and to identify cross-sell opportunities increases efficiency and profitability on the selling and buying side.
All Together Now
By combining segmentation, price elasticity and cross sell opportunities, a B2B enterprise gains visibility into its true sources of profitability. Traditional methods of cost-based pricing are not sufficient anymore. There are data available — and likely already being collected in your enterprise — that provide the requisite information to optimize pricing to drive value to the bottom line.
Successful pricing is not about simply raising or lowering prices; it’s more about intentional price management. B2C companies have already taken control of their pricing. B2B enterprises must do the same.
John Oosterhouse is CFO of Vendavo, a provider of solutions for price and margin optimization.