Key Takeaways
- An effective industrial pricing strategy looks beyond product costs and competitor prices to understand what customers truly value.
- Industrial customers don’t just buy products. They also pay for reliability, availability, delivery, technical advice and service.
- Assuming customers always buy on price can lead to lost margins, missed opportunities and weaker commercial capability.
- Test customer assumptions with pricing research and actual buying behaviour before ruling out value-based pricing.
“Value-based pricing doesn’t work in industrial, manufacturing and distribution.” A good few CEOs say it. Strategic pricers vehemently disagree. Who’s right, and is “commodity” a fact about the market or a decision about pricing?
“Value-based pricing doesn’t work in industrial B2B. We sell commodities. Customers buy on price.”
I hear this from CEOs often, and they mean it. They’ve seen deals lost on price and sat across from hard-nosed procurement teams. Many pricing professionals disagree. Both sides are drawing on real experience. The most useful question isn’t who is right. It’s what the claim rests on.
Read This CEO Pricing Strategy To Improve Margin & EBIT
A CEO of a B2B building materials business told me he wanted to sell much more online. His product, he said, was a commodity, and value-based pricing was too complex for a business like his.
“Customers buy on price,” he said.
“How do you know?”
“It’s what they tell us. It’s what we’ve always been told.”
“Have you looked at what they actually buy, and when they pay more?”
A pause. “Not really.”
The Industrial Pricing Strategy Problem
He has a point. Some of what he sells is genuinely competitive on price. The harder question is whether “commodity” describes a product line or the whole business.
In industrial markets the objection arrives in three forms. We sell the same product as everyone else. Our customers are professional buyers who negotiate hard. And it’s too complex, with too many SKUs and customers to price individually.
Each has some truth. Each also tends to treat the product as the whole offer. Industrial customers rarely buy only a product. They buy availability, delivery, technical advice, credit, range and the confidence that the part will be there when the line stops. Customers also rarely weigh every item they buy in the same way.
Industrial Pricing Strategy and Customer Value
Is it too complex? The concept is simple: understand what the offer is worth to the customer, and price with that in view. What can be complex is the system many industrial businesses run now: thousands of prices set by old rules, exceptions nobody tracks and a discount culture nobody questions. In my experience, knowing your value brings something CEOs don’t expect, which is peace of mind. When you know why a customer pays what they pay, price conversations stop feeling like a gamble.
The barrier is often fear of what customers will say, so the conversation stays internal and the worst is assumed. When CEOs do ask, they are often surprised. The feedback is richer and more useful than they expected. Some tell me they’ve done customer research before, run as a branding exercise, and the answers were light and impossible to act on. Research aimed at pricing is a different exercise.
Nor does value-based pricing mean ignoring cost or competitors. Costs establish the economics, competitors shape the alternatives, and customer value determines how much pricing power you may have. For a true commodity on a spot price there will be limits. Many businesses that call themselves commodities also sell service around the product, which is a separate question.
Why the Belief Persists
I see this often in Australian B2B industrial businesses. I can’t show it’s more common here than elsewhere, though the Reserve Bank’s 2010 study found about half of Australian firms mainly cost-focused.
The Psychology Behind Pricing Assumptions
Repetition makes statements feel true, whether or not anyone has checked them. Researchers call it the illusory truth effect (Hasher and colleagues, 1977). The CEO in my story hadn’t analysed his data. He had heard “you’re a commodity” for years from customers, competitors, the industry and even his own team. What customers say in a negotiation can also differ from what they do.
Confirmation bias then protects the belief: we notice evidence that fits it and discount evidence that doesn’t (Nickerson, 1998). Lost deals get blamed on price. Deals won at a higher price get put down to relationships or luck.
I had this exchange with a general manager recently. “Customers will walk if we move on price.” Which customers? “The big ones.” Have any left after a price increase in the last two years? Pause. “We haven’t really put one through.” Perhaps the belief is right. It hadn’t been tested to find out.
These studies don’t tell us how often such effects cause pricing failures. They describe a pattern worth checking for.
Why Industrial Pricing Strategy Matters
If the belief is wrong, the cost isn’t small, and it compounds in three places.
You lose margin. For a business with an 18 per cent gross margin, a 1 per cent price cut needs roughly 6 per cent more volume just to break even. Every discount handed over on the assumption that “customers buy on price” is margin that rarely returns. At the other end, a 1 per cent price rise adds 1 per cent of revenue straight to the bottom line if volume and costs remain unchanged. For a business earning a 5 per cent operating margin, that is a fifth more profit. These are illustrations, not forecasts. But a business that has never tested a price rise doesn’t know what it left on the table.
You lose opportunity. The customers who would pay for reliability, advice or availability are never shown it, so they never choose it. A competitor that works out how to sell that value takes them, and you may never see them go. Moving a commodity-minded business online doesn’t solve its pricing problem. It can make that problem visible to every customer.
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
The Hidden Cost of Commodity Thinking
Your culture stagnates. If price is a fixed fact, nobody needs to understand what customers gain from you. Over time, commercial capability narrows. Teams become skilled at defending prices and negotiating discounts, but less skilled at understanding customer value or creating profitable growth. Meanwhile, competitors who understand what customers value are better positioned to win profitable business.
CEOs who say it doesn’t work and pricers who say it does may both be right about the businesses they know. The real danger isn’t discovering that your customers genuinely buy on price. It’s running an entire business on that assumption without ever finding out.
If you’d like to test that assumption in your own business, message me directly.
Read This CEO Pricing Strategy To Improve Margin & EBIT
Are you a business in need of help aligning your pricing strategy, people, and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
