Key Takeaways
- B2B pricing strategy examples include discretionary pricing, overrides, discounts, and legacy models.
- Discretionary pricing can create multiple prices and poor price control.
- Excessive discounts and overrides can erode margins.
- Value-based pricing can simplify complexity and protect margins.
Why is B2B pricing so complex? The short answer is that B2B businesses are complex, right down to their products, channels-to-market, supply chains, and operations.
For example, many B2B manufacturing businesses manage large and complex product portfolios. Products are then sold to thousands of customers across different markets and through multiple channels. These channels include both direct and indirect channels; the most common is the direct salesforce channel. Sometimes there are direct-to-customer eCommerce platforms too; often, they are not used. Nearly always, though, products are sold through third-party intermediaries such as distributors and resellers. What’s more, all these products, channels, operations and customers need proper pricing and costing to maximise margins.
Pricing, as we often say at Taylor Wells, is inextricably linked to business strategy and operations. So, what are good examples of B2B pricing strategy?
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The problem, though, is that a large proportion of price complexity is unnecessary, painful to see and work with, and inevitably leads to unprofitable business outcomes for a business and its customers. We are not saying, here, that all price complexity is painful or bad; far from it. However, there is certainly a great deal of price complexity that leads to substantial margin erosion and is almost certainly best to be removed.
In this article, we will be discussing the latter and more painful and unwanted type of price complexity. This is the kind of price complexity that keeps B2B commercial executives up at night. We will explain what we mean here by ‘painful price complexity’, why it drives unwanted complexity and how it leads to substantial margin loss.
We argue that ‘painful’ price complexity is largely habit-based rather than strategic or a form of ‘clever obfuscation’ that provides price flexibility to sales.
In fact, we believe painful price complexity largely exists and multiplies in B2B businesses because all too often pricing is scattered across different functions, communication is poor, or businesses calculate prices using legacy models that are broken or defunct.
See whether your pricing is under controlEffective B2B Pricing Strategy Examples
What is painful B2B pricing complexity?
Painful pricing complexity covers a broad range of ‘pricing habits’; let’s call these habits the ways of pricing that a business has learned and accepted over time, which help sales win deals by driving down prices.
For example, painful price complexity includes:
- Discretionary pricing without advice or guidance
- Increasing and/or unauthorised price overrides to win unprofitable deals, gain share, or drive volume
- Excessive line item discounting to appease customers
- Prolific customer-specific discounting
- Cost-plus pricing in a volatile market
- Pricing without data
- Outdated legacy models that are rarely updated
These are just a few examples of painful price complexity.
Indeed, sales teams can defend these ‘habits’ as necessary or even vital to doing business because the obfuscation provided sales teams with more price flexibility or ‘wiggle room’ during difficult price negotiations with customers.
However, over time these same ‘habits’ have become a noose around many businesses’ necks, as they lead directly to substantial margin erosion and a future of limited and declining revenue.
What are some examples of B2B pricing strategy? Are they really complex and painful?
The article identifies several B2B pricing strategy examples that can create unnecessary complexity and margin pressure:
- Discretionary pricing: Sales reps negotiate final prices without a formal pricing function or governance, creating multiple prices for the same product.
- Price overrides: Sales teams reduce official prices to get deals over the line, increasing price administration and reducing margin when overrides lack clear controls.
- Discounting: Customers and channel partners receive multiple discounts or incentives, which can make price management difficult and push final prices below cost.
- Legacy cost-plus models: Businesses use historical costs to set prices across complex portfolios, which can result in overcharging or undercharging as costs change.
The article also identifies pricing without data, outdated legacy models, and unauthorised overrides as examples of painful price complexity. Together, these examples show why individual pricing decisions that seem reasonable can create substantial problems when applied across thousands of products, customers, and price points. The next sections examine these examples in more detail, starting with discretionary pricing.
Discretionary Pricing
In many B2B businesses, individual reps have had free rein to negotiate the final, end prices for the same product. This is what we call discretionary pricing. It occurs most often when there’s no legitimate pricing function or governance in the business to oversee and set prices.
As a result of years of discretionary pricing (and zero price management), it is common to find, for example, ERP systems filled with multiple prices for the same product across the portfolio. This may not seem like a bad thing, but it makes price management a nightmare, almost an impossible task.
Just imagine trying to manage prices for thousands of products that dozens of salespeople are routinely setting and resetting. The result could be millions of price points in the system. Over time, no one really knows the actual prices or costs of their products with any degree of certainty or where SKUs should best be positioned.
Price Overrides
In B2B businesses, price overrides are often the norm rather than the exception, yet they don’t necessarily improve pricing. In simple terms, a price override is a request to reduce the official price in the system for a specific reason. There are many reasons why a salesperson needs to override a price in the system. However, typically, many requests are linked to getting a deal over the line.
The problem with price overrides, though, is that they significantly increase pointless price admin. Often the commercial manager signs off overrides quickly just to keep up and avoid taking the blame for losing the deal.
Another problem with overrides is that they significantly reduce margin-on-sell each time net price reductions are approved at a line item level. Just imagine multiple salespeople overriding multiple prices each day without advice or guidance across hundreds of SKUs and customer accounts. The net result is time-consuming admin, long waiting times for approvals, messy and illogical prices, and significant margin loss.
There are also more ‘unofficial’ price overrides cropping up. Usually, the rule in the approval process is that price overrides are signed off by an authorised person, such as a commercial manager for smaller requests or an executive for bigger requests. However, increasingly, there are more unofficial price overrides; these have neither authorisation nor explanation.
In fact, we find the vaguer the approvals process, the more ‘unauthorised’ price overrides crop up. A lack of control in this regard leads to margin loss across both discretionary and contracted revenue. What’s more, it leads to unruly and undisciplined pricing habits that are hard to weed out once they have started.
Discounts
In B2B businesses, it is very common for customers and channel partners to get multiple discounts and incentives on top of their usual discounts.
For example, it is very common to see one reseller getting multiple discounts from different sales reps for doing the same thing. This behaviour could be based on achieving a certain volume or a minimum level of spending. It could also be for becoming a new account, a product discount, or a geography discount. It could also be specific. And while the discount comes in handy for a sales rep to close the deal (front-end) and appears to make all the sense in the world on an individual basis, it becomes a financial nightmare at an aggregate level.
The problem with prolific discounting like this is that, again, price management becomes a nightmare. Also, the price structure lacks relevance and price tiers become a financial risk. For example, if discounts have not been considered as a whole and the final price comes below cost, the account is officially loss-making. When this happens, it is very difficult for channel partners and sales teams to know what the right price is. And the business literally begins to haemorrhage money.
Legacy Models
It is not uncommon to see B2B businesses using legacy cost-plus price models that generate two, three or even four price lists for different customer types and revenues.
This situation is fairly common, actually. We’ve seen many B2B price models that set prices using cost-plus pricing. This price method can become less effective when markets, costs, and product portfolios become more complex. For example, consider a business operating in conditions where:
… the cost of a product was stable and supplier costs were all fairly aligned
… with accountants able to clearly articulate operational and variable costs and allocate them at a line-item and site level
… amid fewer commodity price changes
… with stable FX that didn’t disrupt landed costs
… when the business potentially had fewer products and customers too…
Sounds like a dream time, doesn’t it?
The problem with cost-plus pricing models, though, is that they are too simplistic for complex B2B markets. It is a nightmare to account for real-time changes in fixed and variable costs; plus, allocating costs correctly across thousands of SKUs and customers is a complex task.
In fact, often businesses using these models end up overcharging or undercharging customers. How? Models often set costs based on aggregate-level calculations using historical data rather than current or forward-looking cost information. Over time, with lots of erroneous price points in the system for thousands of SKUs and line items, and no forward-looking costings, a company soon loses its way and struggles to identify the cost and $ value of its product portfolio. Over time, inventory becomes loss-making.
Discussion on Complex B2B Pricing Strategy Examples
Economic uncertainty can increase the urgency for companies to get pricing right. Purchasing departments can scrutinise supplier pricing closely, particularly when managing complex spending categories. This increases the importance of consistent pricing and clear commercial logic. Better pricing models and value-based pricing strategies are now required to rectify price inconsistencies and customer complaints.
Plans for a new value-based price model that eradicates unwanted price complexity, as outlined in this article, often combine internal and external data (such as costs, stock on hand, competitor pricing) with strategic parameters (such as the comparative importance of maximising utilisation and preserving price) and information about the customer and override requests (frequency, reason, market, sales rep).
These plans may, over time, introduce a new strategic price methodology or revenue model. These may be based on evolving customer consumption patterns if this is the best way forward. However, all pricing roadmaps and plans must show the transition from where a company is today and where it wants to be tomorrow.
Businesses also need a dedicated pricing function to manage and set prices in order to drive profitability and protect margins. Our findings indicate that, with the right set-up and pricing team in place, businesses can begin to see incremental earnings gains in less than 12 weeks. Over time, the team can capture additional margin through better price management processes. As pricing capabilities mature, businesses can uncover additional margin opportunities, efficiencies, and risks. This occurs as they identify more complex and previously unrealised opportunities.
Implications of B2B Value-Based Pricing
Extensive data on factors such as customer history, price sensitivity, and the strategic importance of the contract are necessary. What’s more, this is vital to reducing price overrides.
A comprehensive knowledge of competitor offerings, including clear price parameters, and potential concessions will give sales teams more insight into the market. Besides that, it gives more confidence that target prices are competitive and profitable.
Value-based pricing will give teams a clear idea of both the target price and the negotiation strategy for customers, with list prices serving as an anchor that aligns with the customer’s view of reality.
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Bottom Line on B2B Pricing Strategy Examples
The painful price complexity of old has had its time. It no longer serves the interests of B2B organisations, suppliers or customers. In this more uncertain and fluid environment, internal commercial capability is the key. It is the only sustainable way to capture the full value of a B2B business’s products, services and operations.
Clear and logical B2B pricing strategy examples should therefore be a priority for B2B businesses. What’s more, all plans for changes must be based on a deep understanding of the company’s products, strategy, culture, and market. And all strategic price architecture designs should address a wider set of customers’ needs and priorities.
It is recommended that sales, pricing and commercial managers explore and test approaches and strategies before establishing new pricing logic and capabilities. This is preferable to simply focusing on the product and cost alone or winning sales through lower unit prices.
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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
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