B2B Business Marketing to Drive Profitability Without Losing Hard-Earned Margin 🏜️
What is the best B2B business marketing? What is the great way to increase customer prices safely in an industrial B2B business (i.e., to drive profitability without losing volume or hard-earned margin and revenue)?
In this article, we will discuss B2B business marketing and explore how to implement highly effective price rise management strategies that deliver immediate profit improvement to a B2B business without volume loss. Even for manufacturers and distributors operating within highly competitive, margin constrained B2B industries.
We’ll argue that the much-trusted cost-plus approach has outlived its purpose and should be put to rest.
B2B Business Marketing and Pricing Decisions
In times of uncertainty (i.e., during a downturn, when demand is uncertain, supply chain falters or when FX and raw material prices fluctuate), B2B industrial companies find themselves in an awkward position of having to increase or decrease pricing quickly to cover costs or drive volume. But the problem with this largely tactical approach to pricing though is that: 1) businesses usually apply modest increases at year-end or 2) apply blanket price increases across entire categories or portfolios to offset rising costs or 3) slash prices to maintain volume and never regain price positioning in the market.
Thus, the real shame in all of this is that all three of these pricing decisions are damaging to the P&L – the businesses’ P&L and across the value chain too (i.e., their customers and their customers’ customers P &L).
In fact, when the realisation hits that most price change initiatives are destroying value, many industrial companies have already lost some of their hard-earned customers, revenue and margin – or have even gone into liquidation.
Sometimes, though, after price rise mistakes have been made and the damage has been done, a few senior executives will reflect on their financial situation and seek out help from consultants. Unfortunately, though, the advice they seem to favour above all is ‘strategic cost down programmes’. Such as major cost-cutting and culling of talent.
However, getting the desired EBIT figures you need to get over a slump in the economy requires a realistic growth strategy. Also, expertise and the development of a new commercial strategy and infrastructure – including a totally new price architecture. Cutting costs alone is not a sustainable way to maximise margins.
Saying that, of course, a lot of companies don’t invest in strategic pricing. Because they know that doing pricing properly is a step-change in commercial thinking, but also a culture change too. For many executives, a step into the unknown can be a daunting pursuit or a place they are not willing to go. Especially for executives that are risk-averse or personally benefitting from the status quo.
Moving to value-based pricing
But, for many industrial companies in 2021, margin pressure is intense and getting worse. The old reliance on ‘Cost-plus” pricing is just not working to get the ROI required or even cover costs. Changing markets, supply chain issues and the increase in raw material costs have shown up many weaknesses in a fairly fixed and rudimentary “cost-plus” pricing modelling.
At Taylor Wells advisory, we strongly believe that although cost-plus pricing may be a trusted approach for an industrial B2B business (especially those who view cost-plus as a goal), it’s certainly not optimal or a recommended approach for 2021.
Deep down many executives in B2B organisations know this already. And some executives are being brave and seeking to find better pricing strategies and or moving from cost-plus to value-based pricing.
For those of you that don’t know what value-based pricing is, value-based pricing is a customer-focused strategy that focuses on:
- discovering what your customer truly value about your products and business
- and then quantifying that value in economic terms to set prices and win more profitable deals
After all, price is the summation of the total economic value of your business – not just your products.
Cost-plus, on the other hand, is based on overly complex cost allocation analysis with a simplistic percentage mark up slapped on top. Cost-plus is accountancy-based, whereas, value-based is market-focused. As such, there is no market intelligence or analytics on the causal relationships between costs and volume and volume and price when setting new customer prices.
This mindset shift from cost-plus to value-based pricing may sound easy to follow in theory. However, pricing done properly can be more challenging in practice. For example, many companies offer hundreds or thousands of products across multiple categories and brands. Thus, optimising prices and building a B2B pricing architecture that is right for a business model, operations and industry will be a daunting task.
But with expertise, systems and advanced analytics, it is entirely possible for B2B industrial companies to overcome all these hurdles. Better price analytics, for example, can allow B2B business to measure and determine value in all major product categories. Such as standard units, configured products, engineered products, spare parts, and kits.
Identifying baseline pricing performance for B2B business marketing
To improve your pricing capability, then, it’s very important to understand your current pricing situation first – with a clear view of where you perform well and where you don’t. Oftentimes, this part either forgotten or avoided as executives race to take action to fix the problem. However, addressing issues with quick fix price increases doesn’t address the nub of the problem.
To exemplify this point, we know an industrial firm that was habitually increasing its prices by 2-3% annually without much thought at all. The belief was that a 2 -3 % price rise was enough of an increase to maintain profitability for the business and deal with inflationary pressures increase without too much volume loss.
However, as time progressed and the market became more and more fragmented, the business found themselves dealing with the risk of a profit downgrade. This was a surprise to many people in the business. The commercial team were quickly tasked to find out the cause leading to significant margin erosion.
Over a month or so, the commercial team monitored and compared past and current pricing performance. It didn’t take them too long to see that they should have issued variable price rises by brand or even SKU level rather than category or portfolio level.
Additionally, even though this industrial company increased its list prices by 3% yearly, the commercial team realised that their average sales price (ASP) decreased. They found that the gap for some goods was actually expanding between list price and ASP. What’s more, the business was giving larger discounts to its distributors (and too frequently) immediately after the price rise was issued for at least 3 months. In the end, it was clear to all that they had lost all marginal revenue gains from their prior 3% price rise and created serious issues with their marketing positioning.
Key takeaways from this case study:
- The business didn’t take time to diagnose it’s problems and didn’t understand the level of their pricing problems required a strategic approach rather than a quick fix tactical approach.
- The business didn’t have enough integrated business-intelligence to monitor transactional level pricing data for each product or segment so didn’t even realise that their pricing approach was severely loss-making.
- Each of their brands depended on various pricing tools – i.e all of their pricing IP, systems were scattered and there was no centralised decision making.
- Discretionary pricing was rife – each sales rep could and the ability to set prices; making it very difficult in turn for the business to see how industrial pricing and profitability are different in all brands and regions.
- There was no pricing team to set and manage prices and revenue. Just a commercial team to do a post mortem after the mistakes had been made and a finance team to calculate and implement a broad brush price rise.
In the end, the executive team had to deal with the huge gaps between their forecasted margin and realised margin quickly yet sensibly. Without 3 months of these poor profit results, the business installed a new strategic pricing function and a strategy execution plan based on the latest pricing rather than old fashioned cost-plus pricing and tactical price rises.
Using a new method to product segmentation and list pricing in B2B business marketing
If industrial companies want to prevent these issues and get real pricing transparency, like this business, they have to build a high-performance pricing team. Not only that, they need to spend time building an extensive transaction database with an accurate cost, volume, price, and margin information for all their product portfolios. From here they get an accurate insight into SKU level profitability and know what direction to take with their product portfolio.
Here are some of the B2B business marketing that industrial companies can implement:
1. Establishing a pricing standard for made-to-stock units
For standard units, companies use attribute-based pricing. To achieve this, they need to separate the portfolio into groups of the same products. Then determine the most vital features for each of them. Such as material, size, or performance according to their experience in the field.
After studying these data, businesses can implement analytical frameworks that evaluate all attributes. Then identify what each contributes to the product value. The frameworks will show several factors when evaluating value that includes historical pricing information about products with the same features. Naturally, companies will obtain the model output along with their own knowledge of the market.
2. Developing quote tools for configured, made-to-order offers or projects
Pricing products that are uniquely configured to meet customer requirements is difficult. Most especially if the target market and feature set are big. For example, some companies have hundreds of products with thousands of features that can be customised. Thus, having more than a million potential offerings. In this case, companies should identify the value of the base model and the individual attribute. Just like the process for pricing standard units. With configured products, each customer segment must also be examined when creating attribute prices.
3. Pricing for engineered-to-order units
Industrial companies normally don’t have any similar goods or products that they can use to set baseline pricing. Because customers buy engineered units to build something from scratch based on their specifications. Most of the time, deals for engineered units are attached to a project. Therefore, the exact unit specifications can’t be determined right away. To accurately price engineered units, industrial companies should identify all the attributes that they are likely to consider. Also, the customer’s willingness to pay for each one.
Customers often modify the specifications stated in their original order on projects for engineered units. Thus, industrial companies should follow a standard value-based methodology for pricing these changes to maintain their margins.
4. Pricing for spare parts
Spare parts and consumables normally account for approximately 20-40% of profit but make a much bigger contribution to a business’ profitability. Industrial companies may be hesitant to move from cost-plus pricing. However, a value-based approach can work for spare parts too. As long as companies create a few category-specific adjustments.
In identifying the value of spare parts, businesses should examine attributes such as: whether they are proprietary or nonproprietary. Also, the transaction features, like the frequency of purchase. Then estimate a customer’s willingness to pay by checking the resale price. Or a spare part’s list price as a percentage of the base-unit (kit price). However, they should aim for consistency in all the portfolio if they use the latter method.
5. Kitted parts pricing
Mostly, industrial companies determine kit prices by adding up the cost of all the items included. This approach allows for consistency and unit pricing is a more suitable benchmark. For example, the business offers some kit that contains dozens of items that usually ordered from different suppliers.
The unit price would include the value of convenience to customers. Certainly, many customers are willing to pay for that value. Because they want to avoid looking for all those units from different suppliers and ordering multiple parts.
Determining discounts and commissions according to performance and customer group in B2B business marketing
When setting discounts, industrial companies don’t usually follow a common approach. Some businesses set them based on the sales volume of a product or performance tier. Others provide standard discounts, regardless of quantity or else reward distributors according to their willingness to follow specific requests. Many industrial companies use this method because they got it through acquisitions.
Industrial companies should be consistent with their discounting method with all of their products. They should consider factors like market demand, sales volume, and desired distributor behaviours. It’s important to note that the specific considerations included in the calculation and their relative importance may differ by company. For example, some industrial businesses might give the biggest discounts to distributors that have a huge inventory of long-tail SKUs. For the reason that they want end-customers to get quick access to essential spare parts. However, others may focus on distributors that have highly-trained support staff that can assist end-customers to understand complex products.
- Industrial companies must create performance-management systems. Supported by tools that highlight the significance of pricing to build confidence in their new initiatives.
- In addition to pricing, industrial companies can take some other steps to improve margins on customised units by using B2B business marketing. With the configured products, industrial firms should also check each customer segment when creating attribute prices.
- For industrial companies, the increase in raw-material costs, however, could be a “blessing in disguise”. Now that they’re facing lower margins, they’re closely examining pricing for the first time in so many years. Also, thinking if the cost-plus approach is really the best one for B2B business.
Companies need to create a more detailed transaction database. That is if they want to avoid pricing mistakes and obtain real pricing transparency. One that has an accurate price, cost, volume, and margin information.
Switching from a cost-plus approach to value-based pricing might improve a company’s return on sales by approximately 5-10%. Meaning, pricing could be the lever that promotes the biggest and instant impact in a market where businesses face heightened competition and rising costs.
To achieve great results, industrial companies must be consistent with their discounting approach across all products. They should take into considerations elements like market demand, sales volume, and desired distributor behaviours.
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