Price Setting: What To Do and Avoid in Competitive B2B Markets!
Numerous factors should shape your strategy when looking at price setting for your business. For one, the only thing that is constant and predictable in business today is the inevitability of increasing competition, change and disruption. The only true surprise is how astonished we all appear to be when competitors outperform us when we have done nothing to prevent it. Yes, competitive tension is increasing, and market activity is neither stable nor rational.
Although the world is changing outside the doors of our large and rather plush organisations; and competitors are sharpening their pricing strategies and tactics to market, we deny the inevitable; preferring to keep busy, look inward and do 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?
In this article, we will highlight the important points to consider in price setting for competitive B2B markets. We argue that hiring a pricing team and the insights they can deliver can be the solution to all of the risks and issues that firms face in their B2B marketplaces.
At Taylor Wells, we believe that pricing managers should think long and hard about their traditional approach (often cost-plus pricing) in price setting and managing prices in highly competitive markets. By the end, you will be inspired to take the initiative and make pricing the most profitable asset of your business.
Things to Keep in Mind Before Executing Price Setting in B2B Markets
99% of businesses, and likely your business included, were 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. Cost-plus price setting worked okay for us because, for instance, the market was much simpler and more stable. Why? Because 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. Maybe you’re already thinking, “Oh, how simple things were!” But let’s not reminisce. We can’t dwell in the past anymore. 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, to be honest, will not delight everyone.
So, before we go too far, let’s focus on price setting. You may not believe it, but optimising your prices is the most efficient approach to increase your profits. We’ll explain why.
What is price setting? Why is it important?
Price setting is among the most crucial duties in a business. Your prices must be high enough to compensate the team and keep the company profitable. At the same time, your prices must be reasonable to attract and convince customers. And even if you do it right the first time, you must still keep a close eye on market and cost trends. But first, how is it done?
Price setting is, obviously, a combination of various strategies. To estimate how much clients are willing to spend, one must first understand the market pricing. It’s also essential to understand the product’s costs so you determine how much you’ll have to pay for it. If applicable, investigate whether the product may be manufactured cheaper or faster to be offered profitably. Some raw materials may provide so much extra value that the price can be raised higher than the production costs. There are always numerous options. However, as previously said, some people do not explore their options and instead cling to the traditional cost-plus strategy.
The Problem with Cost-Plus Pricing in Highly Competitive Industries
Cost-plus price setting got us to where we are today, but it’s not what’s going to keep us growing and strong. It’s doing the opposite and causing us harm. You need to rethink your price setting approaches. 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 your cost position?
You start guessing, plugging in new numbers, 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 your price based on something, right? So what do you do?
How to move your price setting forward?
You keep setting prices by slapping a percentage mark up on costs even though you know your costs are not reliable. Whether on input or an output basis for your customers, your cost environment fluctuates in a volatile market. A fluctuating cost position negatively impact your prices.
A basic percentage mark up on a changing cost position will lead to overcharging some customers and undercharging others. This is when your prices start to expose the business to risk: Anything that creates risk is bad.
The solution? Hire a pricing team.
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 cost estimates, will not serve you well in volatile and complex markets.
Our findings show that with the right setup and pricing team in place, incremental earnings gains can begin in as little as 12 weeks. Using superior price management techniques, the team can capture at least 1.0-2.25% more margin after 6 months. After 9-12 months, organisations are frequently generating 3-7% higher profits every year as they find more complex and previously unrealised possibilities, efficiencies, and risks.
There is not enough time for businesses 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 while your baseline is unknown. What’s more, your cost estimates are leaking margin.
How does a good price setting process look like?
Hiring a pricing team is merely the first step in making prices your most profitable asset. It is critical that you understand the proper pricing procedure. Here’s a step-by-step guide on how to set your prices:
1. Choosing a pricing objective
Establishing a pricing objective entails knowing ahead of time what the firm wishes to accomplish by providing its products. The marketing mix plan, including pricing, becomes smoother if the organisation can identify and position its target market. The pricing agenda must always be aligned with the overall goals of the firm.
2. Evaluation of the target market’s price perception and purchasing power
Pricing teams and business managers are better can enhance pricing by examining the target market’s price appraisal. This may also assist a marketer in assessing how far above the competition a firm’s prices can be set. Considering customers’ purchasing power and how essential a product is to them in comparison to other products allows the organisation to effectively analyse the target market’s price judgment.
3. Predicting the demand
The intensity of demand for a product is affected by the price set levels, which have varying effects on the marketing objectives of the firm. In this regard, the demand schedule can help us comprehend the links between pricing and demand. It indicates how much a product will be purchased at different prices. Except for a few instances, the price-quantity relationship is known to be inverse. That is, if the price is charged high, less will be demanded, and more will be demanded if the price is charged low, indicating that customers are sensitive to prices.
4. Checking your expenses
All businesses should analyse their manufacturing, distribution, and other expenses as demand elasticity when establishing prices. It must set prices that cover all of its costs in order to remain in operation.
5. Monitoring the costs, prices, and offers of your rivals
To set acceptable prices, a company needs to have a clear understanding of its competitors’ costs, prices, and responses in relation to the available range of price points defined by market demand and cost. It is also critical to understand the details of rivals’ offers in terms of quality, pricing, and other elements.
6. Setting your pricing strategy
When deciding on a price, a firm must choose a pricing technique that takes into account cost considerations, rival prices, alternative costs, and customers’ assessments of unique product qualities.
7. Applying the set price
The ultimate price will be based on various pricing systems or the one chosen by the firm during the fifth phase of price setting. But, every business must weigh a couple of extra factors while setting the final price. These include psychological pricing, pricing factors from other marketing aspects, company pricing regulations, and price impacts on third parties.
Price Setting in B2B Markets
The B2B segment is much more transparent than it 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 is through your sales, marketing or finance team. However, the benefit of a good pricing team is that they will help you make more informed pricing decisions using 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. Allow 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. Your pricing team should figure out where the business is in a rapidly changing marketplace. Work out where the business will be in 9 months. 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.
For a comprehensive view on integrating a high-performing pricing team 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.
You can also email us at email@example.com if you have any further questions.
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