Price Setting: What To Do (And Not) In Competitive B2B Markets!
Competitive tension is increasing, and market activity is neither stable or rational which needs to be kept in mind when looking at price setting for any business.
The only thing that is constant and predictable in business today is the inevitability of increasing competition, change and disruption.
The only real surprise is how surprised we all seem to be when competitor take our business when we have done nothing to stop them.
pricing strategies and tactics to market, we deny the inevitable; prefering to keep busy, look inward and doing the same old things.
Humans are risk averse (no matter how we like to think of ourselves). We describe ourselves as resilient, yet we can revel in our comfort zone. Organisations are no different.
Even when faced with enviable change that will cause us harm, we still bury our heads in the sand and carry on as normal.
But what if conventional business wisdom is wrong and we need a new normal? What if we need to think differently to get out of the mess we find ourselves in?
If I could change anything to help you, it would be to think long and hard about why you use cost plus pricing for price setting and manage price in highly competitive markets.
What should we know before attempting price setting in B2B markets?
I understand that 99% of businesses and likely your business was built and have survived to date on a cost plus price setting approach. Cost plus price setting has served us all well, but that was in the past.
In the past, cost plus price setting worked okay for us because the market was much simpler and more stable – you knew your input costs. You probably were quite friendly with your customers and could count your competitors on one or two hands.
In those days, there was limited product price setting complexity and variation, meaning much less transactional complexity to think through… Oh, how simple things were.
(click) But let’s not reminisce. Things have changed. Technology, Big Data, AI and platform businesses have changed business and pricing forever – the economist now informs us that machines are now going to read our thoughts. (Which sounds er, horrible.)
Cost plus price setting got us to where we are today, but it’s not what’s going to keep us growing and strong.
In fact, it’s doing the opposite and causing us harm.
Cost plus pricing in highly competitive industries.
The problem with cost plus pricing in intensely competitive markets is you’re your cost position will move and change a lot more than in a stable market.
Think for a moment, what happens when you are not sure of you cost position?
You start guessing. You start plugging in new numbers, and aggregating costs, and making assumptions to fill gaps…
In changing and volatile pricing situations: where the market has moved, or commodity prices are fluctuating daily, your input cost calculations are out of whack. No matter how complex your cost model is, it is now creating substantial risk exposure and leaking margin.
But you still have to create you price based on something, right?
So what do you do?
You keep setting prices by slapping a percentage mark up on costs even though you know your costs are not reliable.
Whether its on an input basis or on an output basis for your customers, your cost environment fluctuates in a volatile market.
A fluctuating cost position negatively impact your prices.
A basic % mark up on a changing cost position will essentially lead to overcharging some customers and under charging other customers.
This is when your prices start to expose the business to risk: And, anything that creates risk is bad.
In times of change, companies need a pricing team. They need them to adjust prices quickly and accurately using more sophisticated methods and analytics.
Bad pricing, i.e., fixed, static pricing based on estimates of cost will not serve you well in volatile and complex markets.
There is not enough time for business to wait and see how the market reacts.
Markets changes so quickly. You cannot afford to wait for the market to inform you of the best price. You win lose customers quickly and/or leave margin on the table.
Your costs are changing; your baseline is unknown. Your cost estimates are leaking margin.
B2B segment are much more transparent than they used to be. Publish your prices and everyone knows.
Broad based price setting action and bad price setting will lead to price wars, lost customers and a race to the bottom of the market.
Whether you have a pricing team or not, you are still making pricing decisions – whether this be through your sales, marketing or finance team.
The benefit of a good pricing team, however, is that they will help you make more informed pricing decisions using a more sophisticated and up-to-date approaches to pricing and revenue management.
You need a pricing manager team to help you survive during economic change and capture wealth in the good times. Your sales and finance teams are not pricing teams and don’t have the required level of expertise.
Let your competitors fumble along letting their finance teams do cost plus pricing while your secret pricing team pick up viable new business opportunities in the best way possible.
Let the market figure out the hard way why they are losing money while your teams work together to give your shareholders what they want – more money.
Cost plus pricing in an economically unstable time hurts B2B businesses. But, you don’t need to suffer along with everyone else.
Now, is not the time to fix and forgot about your prices.
Now is the time for your pricing team to figure out where the business is in a rapidly changing marketplace.
Now, is the time your pricing team works out where the business will be in 9 months and have a roadmap with clearly defined actions, goals and accountabilities.
You want to work out how the business can survive and grow profitably – if only you had a pricing team to help you.