Explaining Why B2B Pricing Is So Complex With Strategy Examples 💶
Why is B2B pricing so complex? The short answer is because B2B businesses are complex: Right down to the product, channels-to-market, supply chains and operations.
For example, most B2B manufacturing businesses hold huge amounts of inventory (often over 10,000 SKUs or more). Products are then sold to thousands of customers across many different markets and through multiple channels. These channels include both direct and indirect channels: the most common is a direct salesforce channel. Sometimes there are direct-to-customer eCommerce platforms too – often not. 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?
The problem is though, a large proportion of price complexity is also unnecessary, painful to see and work with and inevitably leads to unprofitable business outcomes – for a business and its customers. Not saying, here, that all price complexity is painful or bad – far from it – but 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. 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 ‘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, with poor lines of communication and/or calculated using legacy models that are broken or defunct.
Effective B2B Pricing And Marketing Strategy Examples
What is painful B2B pricing complexity?
Painful pricing complexity covers a broad range of ‘pricing habits’ – let’s call these habits ways of pricing that a business has learned and accepted over time to help sales win deals by driving down prices.
For example, painful price complexity includes (but not limited to):
- Discretionary pricing without advice or guidance
- Increasing and/or unauthorised price overrides to win unprofitable deals to 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
…to name but a few examples of painful price complexity.
Indeed, for many years, sales teams have defended these ‘habits’ as necessary or even vital to doing business because the obfuscation provided them more price flexibility or ‘wiggle room’ during difficult price negotiations with customers.
However, over time these same ‘habits’ have become somewhat of a noose around many businesses’ necks, as they lead directly to substantial margin erosion and a future of limited and declining revenue.
What are the examples of B2B pricing strategy? Are they really complex and painful?
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 which occurs most 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 and across all products. This may not seem like a bad thing, but it makes price management a nightmare – almost impossible.
Just imagine trying to manage prices for > 20,000 products that >30 salespeople are routinely setting and resetting. The end result is literally millions of price points in the system. Over time, no one really knows the real price or costs of any of their products with any degree of certainty or where SKUS should best be positioned.
In B2B business, price overrides are often the norm rather than the exception and really don’t improve pricing much at all. In simple terms, a price override is a request to reduce the official price in the system for a certain 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 to just 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 and without advice or guidance across hundreds of SKUs and customer accounts. Net result: time-consuming admin, long waiting times for approvals, messy and illogical prices and overall millions of dollars of lost margin.
There are also more ‘unofficial’ price overrides cropping up too. Usually, the rule in the approval process is that price overrides are signed off by an authorised person – like a commercial manager, for smaller requests and executive level for bigger requests. However, increasingly, there are more unofficial price overrides – those which have no 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.
In B2B business 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 1 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. Or it could be for becoming a new account. Or a product or 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 lost 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.
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 was okay to use in much simpler economic times and markets. For example, in a time when…
… the cost of a product was stable and supplier costs were all fairly aligned
… when accountants could clearly articulate operational and variable costs and allocate at a line item and site level
… when there were there less commodity price changes
… when FX was stable and didn’t disrupt landed costs
… when potentially there were fewer products – and fewer 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 right now; plus a complex task to then allocate costs correctly across thousands of SKUs and customers.
In fact, often businesses using these models end up overcharging or undercharging customers. How? Models are often setting costs based on aggregate level costings based on historical data – generally prior 3 months’ data. 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 And Marketing Strategy Examples
Recent economic developments have sparked greater urgency for companies to get pricing right. Purchasing departments have also become more aggressive and sophisticated. In many cases, they are expanding the spending categories they manage. They are also looking out for supplier’s pricing inconsistencies. 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 eradicate unwanted price complexity outlined in this article often combines 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 overtime introduce a new strategic price methodology or revenue model. Which are 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 dedicated pricing to manage and set prices in order to drive profitability and protect margins. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Implications Of B2B Value-Based Pricing And Marketing Strategy Examples
Extensive data on factors such as customer history, price sensitivity, and the strategic importance of the contract are necessary. What’s more, vital to reduce 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 the list prices serving as an anchor that aligns to the customer’s view of reality.
Bottomline: 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 of B2B businesses. What’s more, all plans for changes must be based on deep understanding of the companies 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. Rather than simply focusing on the product and cost alone or winning sales based on lower price unit reductions.
For a comprehensive view on maximising growth 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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