How B2B Industrial Can Use Growth Strategies And Manage Margins In 2022 🪛
The B2B Industrial sector is struggling: Inflation is demanding businesses to increase prices. Costs are out of control. New demand spikes are further exacerbating costs. And legacy price inconsistencies are creating new levels of channel conflict, suboptimal price setting and price complexity that procurement teams are using to drive down prices even further. What B2B growth strategies will effectively mitigate B2B pricing and commercial challenges?
In this article, we will continue to discuss B2B industrial growth strategies and pricing. We will look at the drivers of change and key risks and challenges faced by B2B organisations. Plus advice on how to capture more revenue and margin in today’s inflationary environment.
We argue that strategic price rise management and ongoing margin management will be crucial to weather the storm and drive sustained profitability.
At Taylor Wells, we believe margin expansion in B2B is a vital process that enables businesses to gain end-to-end price transparency, as well as eliminate any unwanted cost-induced margin leakage.
B2B Growth Strategies For Industrial Companies
What Changes Are Influencing B2B Industrial Sales, Marketing, And Pricing Strategies?
In the last 2 years, we have seen enormous amounts of change, ambiguity and uncertainty striking the B2B Industrial sector. Supply and demand cost drivers in particular have hit B2B profitability hard, with the prices of raw materials seeing some of the steepest increases in the last 30 years.
The plastics industry, for example, has seen increased demand and production difficulties leading to dramatic price increases and product shortages.
The building materials industry has seen input costs skyrocket as steel prices increased by 60 per cent in 2021.
Freight and transport costs also increased substantially last year when the price of crude oil increased by c.17 per cent and it’s only back down by c.-8 per cent today.
Across the board, in fact, commodity prices have been impacting key materials leading to cost-induced margin leakage. And although costs have decreased in some areas, such as fuel, it can take anywhere from six months to a year before lower shipping costs translate into falling prices across the value chain.
Why Is This Happening?
Central banks around the world are working to target interest rates. The purchasing power of the dollar has fallen significantly over time. We are in unprecedented and murky waters with the rise and fall of input costs; demand spikes creating new cost pressures, and largely under-valued inventories and businesses.
We are seeing too many companies experiencing margin loss through ineffective terms and conditions relating to input cost changes. For example, we see many companies with escalatory rise and fall clauses that do not reflect real costs and/or have no measurement periods.
Likewise, we see thousands of redundant and expired customer pricing records left in the system because contracts and pricing have simply not been managed or updated when price changes occur.
Many legacy prices and contracts are essentially causing businesses to absorb all of the input cost risks with limited upside rewards when they should have passed these costs onto the customer.
Fuel, energy, raw materials, and other similar items all create margin risk exposures that must be addressed through a pricing mechanism of one type or another.
We are seeing a significant demand spike increase a whole range of costs:
- Increasing numbers of bespoke and customised orders driving up operating expenses and cost of goods;
- Manufacturing overruns driving up labour costs and operational costs;
- Increasing frequency of delivery and geographically dispersed deliveries driving up cost-to-serve, delivery, transport and fuel costs.
Thus, a strategic price architecture must be developed to address demand-related cost risks.
Under-Valued Product Portfolio
We are also seeing significant increases across most industry Indexes: In 2021, for example, the Producer Price Index, rose by and rose by 24.4%; the index’s largest calendar-year increase since 1974. Then, in the same 12 months, the International Commodity Price Index also increased by 49%.
Most businesses are not making big enough price increases to offset inflation and increases to keep up with industry indices. Moreover, underwhelming pass-through rates show businesses are not capturing value from their pricing and are often not covering costs, let alone tracking alongside these indices.
Legacy pricing structures riddled with price inconsistencies and discrepancies across an entire product portfolio do not unlock the true $ value of the product portfolio and worse still make it impossible for teams to set optimal prices or capture value from a price rise.
Dangerous waters to be in when dealing with procurement teams trained to spot price inconsistencies to seek further line item price reductions on SKUs that are already underpriced to start with.
With all of these pressures; and ongoing supply chain issues, it has become incredibly difficult for teams to leverage pricing to drive profitability using existing price structures and often zero pricing processes.
Many leaders are hoping for the days when inflation ends. However, a return to the era of stability that guided previous decision-making on prices is becoming less likely. Why? Geo-political tensions, wars and global economics and monetary systems continue to worsen. Your teams will always need the ability to respond quickly, precisely, and confidently as conditions in their industries continue to change.
Developing And Accelerating B2B Commercial Growth Strategies
Maximise your margins safely by making small, but fact-based decisions
Many B2B companies operate in mature markets. Competition is generally heavy and margins are often slim to skinny. The best and most realistic pricing strategy for B2B businesses is to safely make small changes to improve margins using pricing by focusing on your core portfolio and/or within existing segments. Of course, this means gradually moving existing cost-based pricing structures to value-based price structures.
For example, reevaluate your product pricing to take more accurate and regular price increases to offset inflation. Protect margin by reducing unnecessary giveaways and reevaluating discount ranges. Segmenting offers, applying surcharges, or passing on changes in the cost to serve. Finally, consider pricing in additional sources of value (e.g., service).
Ultimately this value-based approach enables companies to expand their profitability safely over time. Without disrupting teams, competitive dynamics or customer expectations. To make this really work in B2B though; especially, in businesses operating within siloed cultures, margin expansion strategies must first start with a thorough examination and identification of all current margin leakage areas (i.e., where, when, and how margin is lost and the impact of this on the business, its suppliers and customers).
Protect margins by controlling your costs using better tools, team structures and communication strategies
The reality is that economies are slowing down. To manage constant business uncertainty, companies must develop costing and pricing capabilities to optimise cost and prices to changing conditions and markets.
Don’t just go with your gut instinct. Power up your teams to protect your margin by controlling your costs.
1. Establish a cross-functional team of procurement, R&D, supply chain, and finance to gain a thorough understanding of your supply chain and enhance your raw materials mix.
This is essential for calculating a low-cost pass-through lag. So, ensure everyone is on the same page and ready to act when necessary.
2. Utilise data to link cost, supply chain, and pricing. Understand cost throughout the supply chain and cost mix. This way you can provide data-driven responses when customers request a price reduction.
3. Communicate with the market openly and honestly. You can avoid upsets and foresee reactions this way.
4. Remember, it’s not smart to have across-the-board markdowns. When deciding whether and how much to cut prices, use a value-based approach. Consider value maps and customer value models to manage your discounts.
5. Respond to your customers fairly and promptly to avoid upsetting them. The way you are treating them is critical in gaining their favour when costs and prices rise in the future.
Discussion And Examples Of B2B Growth And Pricing Strategies
Getting pricing right is challenging for businesses. Especially those that manage complex product portfolios and multiple contract agreements across many different market segments and customer groups. Adding to this complexity are market environments influenced by inflation, competitive moves, fluctuating raw-material prices, and regulatory constraints.
However, to help the business fast track to its main outcomes, they must work out the activities that lead to margin loss and growth. Build the right tools and systems to reach outcomes safely. And then embed proven processes as quickly as possible into BAU.
Often this means developing and implementing a range of differentiated price increases tailored to each SKU and customer’s situation. Rather than implementing an average across-the-board increase.
This approach to setting prices is an organisation-wide capability founded on a strategic price architecture. This means:
Price improvements are driven by price setting precision, attention to detail, and agility.
Pricing strategy is developed and refined by pricing, sales and marketing teams with the support of advisors.
The Pricing Framework is deployed and automated by the right systems.
Business Trends To Focus Your B2B Growth Strategies
Growth does not come easily. Every B2B organisation understands this. So, to help you prioritise your efforts, here are some business aspects to consider when implementing B2B growth strategies:
1. Customer Experience And Service
B2B sales are not just about huge budgets and aggressive marketing campaigns to attract new customers. It is also important to focus on your existing customers and provide them with a good customer experience every time they engage with you. Where do you begin?
Customer service should be available in real time. You should quickly resolve customer complaints. Be accommodating when it comes to refunds and cancellation policies. Furthermore, marketing campaigns that are personalised and relevant are delivered. Customers will appreciate free upgrades, event invitations, and other perks.
2. Digital Transformation And Data
We are living in the midst of a full-fledged digital age. Digital transformation in the corporate world is all about boosting business operations and performance. For example, artificial intelligence can be used to anticipate revenue, correlate historical performance, and make reliable forecasts.
Data is essential in many digitalisation use cases. A lot of business decisions are made through a bunch of opinions and gut instinct. But, that is not the most efficient way of making decisions. Alternatively, rely on concrete evidence based on high-quality data.
3. Privacy And Security
Many experts believe that the most important requirement of modern digital business operations is data security, privacy, and oversight. To have a chance of growing your B2B business, you must demonstrate to your customers that their information is safe. You can use data protection teams and solutions to protect your company and customers.
Implications Of B2B Growth Strategies To Immediate Profit Risks
This current wave of inflation is the worst we’ve seen in 30 years. If legacy pricing practices are too slow, too lax, and too undifferentiated the business will experience significant margin leakage. For example, manufacturers with limited commercial capabilities and gross margins below 20% will almost certainly find EBIT margins close to zero in this current environment of heightened inflation. Which means a profit downgrade situation is imminent.
Working within broken structures using legacy price structures destroys a company’s operating margins. If you are a business with EBIT margins of 5%, and you allow your sales teams the discretion to offer additional tactical discounts of 5%, for example, you have theoretically put 100% of your EBIT margin at risk.
Businesses that make provision now and invest in their teams and the right skill sets will secure and maintain information, strategic, and sales advantages in their industries. Therefore, they weather through tough economic storms.
Margin expansion isn’t rocket science. Nevertheless, it does require dedication, executive leadership support and discipline.
The payback is substantial. In our experience, effective margin expansion initiates can generate 2 to 9 percent additional margin on total addressable revenue.
By making small improvements in your B2B growth strategies today, you’ll quickly see how much money you can save and make with these ideas and proven strategies.
For a comprehensive view and marketing research on integrating a high-performing capability team in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
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