B2B Tiered Pricing: An Effective Strategy to Price and Sell Your Products 🛍️
Why is B2B tiered pricing so important for B2B companies?
Price changes can often be a painful process for B2B firms. Especially manufacturing and distribution firms. For one, implementing a price change is not a simple process when you’ve got to change prices across thousands of SKUs, hundreds of brands, numerous categories, and multiple customer groups. Added to this, ‘special pricing’ and ‘tender pricing’ often complicate the pricing system; commonly resulting in multiple price points for the same product and customer and millions of spurious price points.
We ask, is there an easy way for B2B firms to escape unwanted price complexity and replace with simple and effective B2B pricing?
In this article, we will reveal what best-in-class B2B pricing looks like, providing real-world case study from Caterpillar – a leader in B2B manufacturing. We will also discuss why B2B companies should use tiered pricing and share with you the advantages and disadvantages of using B2B tiered pricing model.
We argue that the latest pricing techniques, such as tiered pricing, are fast becoming popular in B2B because of the flexibility and simplicity offered to B2B firms.
By the end of this article, you’ll know exactly how to create a tiered pricing model for your business that can generate at least 1 to 2 per cent additional margin in the first 12 months.
B2B Tiered Pricing
Tiered pricing is when a company or business sells its goods/services at different prices to different customers or customer types.
A business may choose to use a tiered pricing model to offer optimal discounts to specific customers or customer types while fencing off other customer groups that are not eligible for discounts.
In a tiered pricing model, customers are usually segmented by determining price fences. The most common being: volume, how much they spend, or how long they’ve been purchasing from their businesses. However, Caterpillar does price tiering differently and creates additional value fences in their pricing model to fence off value.
In simple terms, value fences are a great way to segment customers based on how they like to buy, and the problem they are solving. So, by adding both pricing and value fences in one pricing model, Caterpillar has been able to capture additional price premiums that their competitors can only dream about.
Case Study: Best-In-Class Pricing From Caterpillar
In 2014, Caterpillar launched a new approach to assisting customers in controlling, monitoring, and managing equipment at the same time improving jobsite efficiency. In this time, they also created Cat Equipment Management Solutions (EMSolutions), a portfolio of tiered service offerings with the aim to help manage equipment and machinery and reduce operating costs.
EM Services is an extensive system responsible for monitoring, maintenance and repairs. It doesn’t matter whether you just own a few equipment or you manage a big commercial fleet, EM Services will deliver a custom-built plan to help lessen downtime and keep your equipment assets in good operating condition.
The progressive levels of Equipment Management Services (EM Services) include three primary offers. The levels of service guarantee that you get the support customers want. Basically, the customer can choose to do their own maintenance or choose to get a dealer to take care of the details while they focus on the worksite.
Level 1: INFORM
Level 1 price tier, provides businesses access to data and reports on their equipment in a timely manner. After the equipment and software are connected and the pricing subscription is activated, customers will then start to receive information to help them manage their equipment more efficiently.
The Level 1 Package is designed for companies that are knowledgeable at managing the operating condition of their fleet independently.
Level 2: ADVISE
Subscribing to the Level 2 price tier allows customers to get professional advice from a dedicated Consultant from Caterpillar. A company will also receive trusted recommendations about utilisation, repair, and equipment maintenance, including a quarterly Fleet Report.
The Level 2 price tier is perfect for customers that choose to have an expert to help them manage their fleet with the highest efficiency.
Level 3: PARTNER
Level 3 price tier is designed for customers who want to devote more time to managing their business projects and less time handling their fleet. This price tier is customized to fit the companies’ needs and the most expensive price bracket.
Customers that want to have one of Caterpillar’s partners to help handle machine maintenance fit within this price tier. This level includes a dedicated Condition Monitoring Advisor managing the fleet and providing expert recommendations so that managers can make decisions based on facts about maintaining and using the equipment.
Using these clearly defined service levels, customers can talk with their dealers to select the support they need to help them manage their machine and equipment and improve the bottom line.
Why use B2B tiered pricing?
Most B2B companies use the common three-tiered models but there are some that use four-tiered architectures and some businesses have even more. Why are these pricing models so popular with B2Bs?
Pricing is a complex task for any business most especially for B2Bs. B2B businesses often sell their products/services at different prices for different customers segments that alter as a result of rebates (volume commitments), discounts for volume or exclusivity of supply, negotiated prices / special prices for premium purchases.
Since pricing is quite complicated for B2B companies, they need a strategy and structure before dealing with buyers. Tiered pricing is one effective strategy that can help B2B companies to effectively price and sell their goods and services. Again, this is where value fences come in.
For example, most customers value reliable delivery, quantity and quality over price. These types of customers regard reliability with high value, and this is indicated in the price they are willing to pay for the product/service. In other businesses, they offer discounts for bulk orders or sell at a premium for customized product. For loyal customers, companies can reward them with special pricing.
However, before establishing your tiered pricing for your business, you should segment your customers first. You have to build customer segments based on their size, spending habits, or the length of being loyal customers. Then, assign specific pricing for the products for every segment or tier. You can also provide each tier with special discounts as it helps in increasing and retaining the existing customer base or the prospective ones. Consequently, this will help you in tracking your customers, the revenues, and other metrics easily.
One reason to use tier pricing is to gain more customers while optimising pricing. When you provide more features, functionality and value, you can increase prices.
However, doing so may lead to losing customers who are price-sensitive and don’t need the full functionality of your product. Therefore, you should have various pricing tiers. In executing this pricing strategy, test different price points and function packages until you achieve the upsell you’re looking for.
Tier Pricing Structure
Now, designing price tiers based on a combination of value and price fences requires thought and expertise. Here’s how you can structure your pricing model based on tiers:
- Align your pricing metric to your value metric.
- Determine the role of each tier.
- Establish a buyer persona for each tier.
- Create a model of how much upsell, revenue or operating profit you want from each tier.
- Set prices then outline bundles across tiers.
- Test and modify until you reach your optimisation model.
Advantages and Disadvantages of Tiered Pricing
As with other pricing models, tiered pricing has also its pros and cons. Let’s take a look at some of them:
- Tiered pricing attracts customers who cannot afford standard priced packages
- Encourages buyers to upgrade when they’re their requirements expand
- Enables businesses to align the value with price
- Complication in calculating bill amount
- May disappoint customers because they are not sure what they’ll pay for the product
- In B2B tiered pricing, you should be careful in deciding the value metric. Not only that but also the cost for the specific tiers. Your value metric can either be risk drivers, usage, quantitative, feature sets or based on how your consumers perceive the product/service. The number of tiers should target different market segments, and making sure not losing out on revenue.
- Before implementing tiered pricing, you should first segment customers according to customer lifetime value, average order value, and the length of the business relationship.
- Robust B2B tiered pricing model means providing real value to customer segments and properly matching the buyer persona to pricing.
Tiered pricing is effective and helpful for B2B companies because it allows businesses/consumers to pay for what they can afford. It also encourages them to purchase more to qualify for discounts.
A great reason to use tiered pricing is to capture more of the target market while optimising pricing. As you provide more features and functionalities, you can gradually increase prices and grow incremental EBIT under the radar. However, increasing prices too much may lead to losing some customers that are price-sensitive and don’t need the complete features. This, in turn, encourages you to have lots of pricing tiers just like Caterpillar. But only when you are clear on your price and value fences and segmentation strategy.
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