A Guide on How to Jump-start B2B Value-Based Industrial Pricing Strategies 🦺
Many industrial firms are beginning to recognise that no other factor has a greater ability to boost profitability than price. When confronted with stiff competition and unpredictability in raw-material costs, businesses tend to respond in a variety of traditional methods, including cost-cutting and attempting to enhance procurement. However, forward-thinking firms see better opportunities in realising the strength of B2B value-based pricing. The question is, will this provide the most benefit?
The prices of raw materials, such as steel and plastic, are rising again after years of deflation. Price hikes are raising new concerns over the sector’s reliance on cost-plus pricing. Some industrial companies believe that pricing their products and services based on cost will no longer be able to sustain their operations. Thus, businesses are now considering the timing and scope of modifying their pricing techniques while contemplating a shift to B2B value-based pricing, based on customers’ willingness to pay. How are they going to pull this off?
In this article, we will discuss how industrial pricing is evolving in response to costs inflation. Then we advise on how firms can initiate change and further develop their B2B value-based pricing by evaluating and managing new approaches. We argue that switching to value-based pricing can help industrial firms resolve the pitfalls of growing costs.
At Taylor Wells, we believe that B2B operations in the industrial sector can effectively combat severe competition and unpredictable raw-material prices by transitioning to value-based pricing. By the end, you will learn how to assess the value of your products across multiple product categories, such as standard units, customised items, engineered products, spare parts, and kits. This allows you to accurately estimate feasible price changes that will drive profitability.
B2B Industrial Pricing Strategies are Evolving
The industrial sector is seeing a continuous rise in raw-material prices. The Stainless Steel Index, for example, has jumped over 25%, as nickel and ferrochrome prices have also skyrocketed. With the Global Low-Density Polyethylene Index increasing by more than 7%, prices of plastics have also soared. The troubles of industrial enterprises do not end with these rising costs. Major governments around the world have also introduced tariffs and duties that are driving up raw-material costs even further. The commodities markets, therefore, are in a state of flux—gone are the stable markets of old.
Industrial firms are adjusting their pricing strategies to counter rising costs.
Many businesses are modifying their prices in the middle of the year. Businesses dealing with heating, ventilation, and air-conditioning (HVAC) raised prices in June rather than the customary months of November or December. Some upped rates by 5-8%, compared to the normal range of 3-6%.
Some industrial enterprises are rebooting the overall profitability of the industry. Take the lighting-fixture sector. In 2019/20, many lighting products were commoditised under market pressure for lower prices, resulting in lower prices. And when a few companies raised their prices, others swiftly followed. As a result, profits grew higher than those recorded before the surge in raw-material costs grew again.
Such case examples show that optimal and regular price adjustments provide considerable ease. However, most industrial companies do not use modern analytics to calculate their prices. Some bump up their price schedule by 400% and/or impose few but significant price premiums on top of their usual and simplistic markup methodology. Often these price rises do not stick in the market. The pass-through rate is <20% using the crude price rise methodology; rendering many business forecasts for the year meaningless. New pricing strategies and price setting methodologies are no longer optional. They are crucial to the survival of many B2B businesses. And it is high time to consider a B2B value-based pricing.
The Strength of B2B Value-Based Pricing as an Industrial Pricing Strategy
What is the first step in B2B value-based pricing? Here are 4 things you can do to make the shift to B2B value-based pricing a success:
1. Evaluate the current pricing performance
Performance evaluation reveals unseen problems. Managers at one industrial company we know used to raise list prices by 2-3% per year. They believed that doing so would allow them to sustain profitability even as inflation increased. However, the pricing analysis showed that price increases varied significantly by brand. Moreover, even when the company boosted list pricing by 3% each year, the average sales price (ASP) did not keep up. Since the company regularly raised distributor discounts to keep its consumers happy, the gap between list price and ASP rose for some products. What caused these problems?
Several issues had contributed to the company’s situation. For starters, it missed a business intelligence system that collects specific pricing data for each product. Each brand also used distinct pricing techniques and had its own sales team. This makes it difficult to evaluate how pricing and profitability varied among brands. Additionally, the company improperly mapped the costs for many of its goods, resulting in substantial gaps between the planned and realised margins.
They need a holistic transaction database with the correct price, cost, volume, and margin information for all of their products, including engineered-to-order and customised made-to-order offers. This includes extensive pricing and discount information that provides a view of SKU and customer levels. We will discuss these in the next steps.
2. Roll out a new process for product segmentation and B2B value-based pricing
Following the examination of performance, industrial enterprises must address difficult pricing concerns. They should ask themselves questions like, “What causes a buyer to allow a $5 increase in price yet object to a $7 increase?” or “Why does a 3% discount have little effect but a 4% discount has drastic outcomes?” This type of questions is difficult to answer even for pricing experts. What can you do?
How can B2B industrial firms implement value-based pricing?
- For standard made-to-stock items, use attribute-based pricing. Divide the portfolio into groups of similar items and identify the most significant aspects in each one, such as size, material, or performance. Determine how each feature adds to the product’s value using analytical models. Nonetheless, companies must weigh the result with their own industry knowledge. They clearly cannot follow a model’s recommendation to price a product at $25 when the leading competition costs only $10.
- For customised made-to-order items, consider each client segment to determine prices. Leather seats, for instance, are preferred by owners of both low-end and high-end vehicles. But they differ in what they’re willing to pay for this option. Remember this while deciding on a price.
- For engineered-to-order items, identify all of the offer’s inclusive features and customers’ willingness to pay for each one. Think about the possibility of cost adjustments, otherwise underpricing may occur. Some attempt to boost profits by pushing clients away from engineered items and towards modular products with the same functions, such as a wired system that includes all necessary components. The transition to modular products does not technically qualify as a change in pricing strategy, but it achieves the same goal which is higher returns.
- For spare parts, analyse factors such as authenticity and transaction features such as purchase frequency. Take into account customers’ willingness to pay by assessing proxies such as resale price or spare component list price as a proportion of the base unit or kit price. This will assist you in determining the best price possible.
- For kitted offers, a suitable choice is unit pricing. For example, the company provides a kit that includes dozens of components from several manufacturers. The unit price would capture the value of convenience to customers, who don’t want to track down and order multiple parts.
3. Implement the same discount strategy for all products
When it comes to setting discounts, industrial enterprises don’t usually use a consistent strategy. Some businesses base them on a product’s sales volume or performance rating. Others give uniform discounts regardless of volume, or reward dealers solely for their willingness to comply with specific requests. Many businesses use this technique because it grew through mergers. The company and its target may utilise different ways for determining discounts for its brands, and the new organisation simply continues to employ the old procedures. But it might be a good idea to make changes to discounting strategies.
For the best outcomes, industrial businesses should use a uniform discount strategy across all products, taking into account elements such as sales volume, market demand, and targeted distributor behaviours. Just remember that the mentioned key aspects, as well as their relative merits, may differ from one company to another.
Some industrial enterprises, for example, may provide the largest discounts to distributors who have a large inventory of SKUs because they want end customers to have fast access to critical replacement parts. Others may prefer distributors with highly qualified support staff who can assist end customers in understanding complex items. These are some techniques for appropriately setting discounts.
4. Manage B2B value-based pricing performance
To become more confident with their new strategies, industrial organisations should construct performance management systems supported by instruments that underline the value of price. Various industry players developed technologies that allow sales personnel to input crucial data for negotiations, such as transaction size and frequency. The data is then analysed by instruments, which yield insights that aid in setting prices.
Consequently, they established a central pricing team to assess if price increases were hurting sales volume and value capture. It also kept an eye on all business units to make sure they were complying with pricing and discount criteria. The team tried to discover the reason for any discrepancies.
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.
The rise in raw-material prices may turn out to be an unforeseen blessing for the industrial sector. While struggling with smaller margins, B2B firms are rethinking pricing, realising that the strength of value-based pricing will give the best outcomes to their business. Companies that go from cost-plus pricing to value-based pricing may see their profits increase by 5-10% on average. As a result, in a market where enterprises confront greater competition and soaring prices, pricing may be the lever with the greatest and most immediate impact.
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?
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