Key Takeaways
- What is price adjustment? Changing prices based on actual costs, customer needs, and profitability.
- Use precision pricing to identify justified price increases and avoid blanket discounts.
- Segment customers into profit peaks, profit drains, and profit deserts to guide pricing decisions.
- Use structured pricing management and governance to assess costs, improve pricing decisions, and protect margins.
Most B2B companies make the mistake of setting uniform prices or across-the-board price adjustments. Some companies offer unnecessary discounts too frequently on items that customers donāt even need to buy. On the other hand, some customers are willing to buy from you regardless of the discount you offer because they really need your products or services. Others would have bought at a 10% discount rather than a 20% discount. So, what is a price adjustment?
What Is Price Adjustment and How Should B2B Businesses Approach It?
Price adjustment is a change to the price of a product or service to reflect costs, customer needs, profitability, or changing market conditions. For B2B businesses, effective price adjustment means moving beyond uniform price increases and across-the-board discounts. Instead, companies should use precision pricing to understand which adjustments make sense for different customers and products.
A more targeted approach involves four key steps:
- Review actual costs. Examine manufacturing, shipping, administrative expenses, and discounts to understand the true cost of supplying each product or service.
- Assess customer profitability. Use customer information, buying patterns, sales volumes, and past performance to identify profitable accounts and sources of profit leakage.
- Segment customers. Distinguish between profit peaks, profit drains, and profit deserts so pricing decisions reflect each categoryās contribution to profitability.
- Evaluate pricing decisions. Consider costs, margins, revenue, customer value drivers, and price sensitivity before deciding where price increases or other adjustments are appropriate.
The objective is to protect profitability without relying on blanket price increases or unnecessary discounts. This is where precision pricing and enterprise profit management can help businesses make more informed decisions.
>Download Now: Free PDF How to Drive Pricing Strategy to Maximise EBIT Growth
Unfortunately, most companies donāt think about how their prices influence customers. Many fail to recognise that customers have different requirements, problems, value drivers, and needs.
Whatās worse is that they think that frequently implementing discounts and slashing prices will solve most of their problems. In the long run, these decisions erode margins and make customers dependent on discounts. Hence, the way you present prices to customers can change how they buy from you.Ā
See whether your pricing is under controlIn this article, we explain how B2B businesses can use precision pricing to identify targeted price adjustments for different customers. We examine how customer value, cost analysis and profitability can help businesses make better pricing decisions, particularly when inflation and rising costs put pressure on margins.
When inflation and other cost pressures affect profitability, how can B2B businesses segment their customer base to make better pricing decisions?
What Is Price Adjustment? How to Adjust Prices During Inflation with Precision Pricing
Precision pricing considers differences between customer groups and takes current costs into account. It also helps businesses assess each clientās profitability. This pricing system allows you to examine all relevant costs, including manufacturing, shipping, administration, and discounts.
A precision pricing process can use records of past performance, customer information, buying patterns, sales volumes and purchasing activity to inform pricing decisions. Where appropriate, this information can be combined with data from sales and customer service platforms to help businesses assess customer profitability and buying behaviour. This helps you assess price elasticity and supply and demand factors, identify clients that generate growth, and distinguish them from clients that erode profitability.
Likewise, implementing any changes to the price of new or existing products or services will affect your overall sales volume. Because customers often use price as an indicator of value, pricing decisions can influence their perceptions of a product or service.
What Is Price Adjustment and Its Psychological Impact?
Research suggests that prices ending in .99 can influence how customers perceive prices, although the effect varies by context. Academic studies have found evidence of left-digit bias, in which customers may perceive a price such as $4.99 as meaningfully lower than $5.00. Businesses should consider how price presentation affects perceived value and brand positioning.
Then thereās the strategy of creating a sense of urgency, such as “buy one, get one free” or “one day sale, 50% off” promotional offers for a limited time. These offers aim to create urgency and encourage customers to take advantage of a perceived deal.
If pricing significantly influences brand perception, how can B2B businesses use this to their advantage? As a business, how can you determine the true cost of your products or services?
Businesses need to compare actual costs and profits with standard costs. This is because businesses often set prices using annual cost figures rather than the costs and expenses associated with individual products. This only further blurs the actual cost of products and services consumed by buyers. Instead, most pricing teams and business leaders address this by evaluating pricing decisions based on key metrics that combine costs, margins, and revenue.
Enterprise Profit Management: A Guide to Price Adjustments During Inflation
EPM involves in-depth financial analysis of complex B2B markets. It can help businesses identify opportunities to improve profitability through better cost management, pricing decisions and resource allocation. The insights generated through EPM can also help pricing teams make more informed decisions.
EPM supports price adjustment through the following activities:
- Planning and analysing finances and budgets
This covers operations in each department, sales activities, and key metrics that track each department’s progress and success rate. Financial chiefs should supervise these tasks while working with sales managers, marketing, and pricing teams. - Managing Your Products, Services, and Suppliers
This requires you to identify which clients and products fall into the profit peak, profit drain, and profit desert categories. - Supply chain management
This involves monitoring shipping times and costs to identify delays and track delivery performance. What contingency plans are in place to address supply chain disruptions? Similarly, tracking your inventory and cost management is part of the task of serving your clients. Use available market information to assess competitorsā pricing and, where possible, estimate how their cost positions compare with your own. Then check what changes and adjustments you can make from current market trends. - Sales function
This involves planning the sales process around your target customer base and understanding your product differentiators. It should also include a sales forecast that pinpoints where you currently are as an organisation and the numbers you want to reach. This involves in-depth research, data analysis, the right tools, and testing different approaches.
When using EPM, clients fall into three profit categories:
Profit peaks are customers or accounts that generate relatively high profits for the business. Identifying these accounts helps pricing teams understand which customer relationships make the strongest contribution to profitability. Their exposure to transportation and shipping cost increases should still be assessed individually.
Profit drains are high-revenue clients that generate relatively low profits and can erode overall profitability. They may generate revenue but deliver relatively low margins because of the products or services they purchase. Targeted price adjustments may improve the profitability of these accounts, but businesses should assess how customers are likely to respond before making changes.
Profit deserts refer to clients who generate little profit and revenue. They arenāt so obvious in most cases, but they often exist. They may seem subtle and insignificant at first, which is why examining your client category is crucial. Most companies realise this only when their accumulated losses become a major problem.
For example, frequent customer complaints may indicate problems with product quality. These clients might withhold payment for faulty products or services and demand replacements, refunds, or free after-sales maintenance that was not previously agreed upon.Ā
One way to address this is to look into your expenses for customer service. Higher-than-usual customer service costs can help identify clients that fall into the profit desert category. These indicators should be considered alongside account revenue, service costs and other profitability measures before classifying a customer as a profit desert.
On the other hand, if you seem to have too many customer complaints coming from different clients, then itās time to consider innovation and improve the quality of your services. Improving the customer experience can also reduce customer service costs.
āŖāŖāŖ Get Your FREE Pricing Audit āŖāŖāŖ
Bottom Line: What Is Price Adjustment? How to Adjust Prices During Inflation
Precision pricing examines the actual costs and expenses of each item rather than relying solely on monthly or annual cost totals. This helps you pinpoint where you can increase prices and which operational processes can be flexible and negotiated.
Knowing what to do for each B2B customer category is essential. For instance, ending a relationship with an unprofitable client shouldnāt be the first step to addressing the challenge. Instead, both parties should first renegotiate terms to find a solution that works for them.
Segment your target market and assess how inflation and rising costs affect each customer group. When building partnerships, balance profitability with the risk of potential losses. Regular evaluation and analysis of your P&L while employing enterprise profit management will keep you afloat despite rising inflation.
For a comprehensive guide to building a high-performing pricing team, download our complimentary white paper, How to Drive Pricing Strategy to Maximise EBIT Growth.
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 team@taylorwells.com.au if you have any further questions.
