What Is Pricing? New Horizon For Australian B2B Business Is Here
What is Pricing: Pricing is the process whereby large organisations set and get the right prices for their products, services and assets. Its aim is to set optimal price points, for the purposes of driving profitability. But why should businesses bother to set and manage their prices properly?
What is pricing in a business environment?
By focusing on what is pricing – a business’s most highly leveraged profit driver – pricing and revenue management teams want to learn more about the pricing processes that maximise revenue and margins.
Companies have earned an 8% increase in operating profit for every 1% of improvement in realised price – roughly twice the benefit as a 1% improvement in market share, variable costs or fixed-cost utilisation.
Essentially, pricing and revenue management teams are trying to make the pricing process more scientific, agile and innovative.
They want to move away from gut feel pricing decisions that lead to margin loss and strained customer relations and break down an entrenched commodity mindset that slows down innovation and progress.
Many approaches to what is pricing exist: For some time, the dominant approach, was cost plus pricing.
This focused on setting the sell price for different assets (typically hard durable goods but also supply constrained commodities like fuel, gas, chemicals and grains) based on how much it costs to make or deliver an item plus a flat percentage margin on top, usually aiming for around 25%- 50% depending on the industry.
Typically, businesses that use cost plus pricing also have a fairly fixed pricing process. Fixed pricing refers to predefined pricing strategies, structures and operation that are fairly static regardless of customer value drivers, demand or market changes.
The dangers of fixed, cost-plus pricing processes are that business can overcharge some customers and undercharge other customers. Often as costs reduce, so do the sell and cash margins. Year on year, profits fall significantly on the same volume.
Individual sales managers tend to like cost plus pricing because it is straight forward and gives sales teams broad authority to negotiate individual deals by heavy, non-standard discounting off list – referred to list less discount.
However, procurement teams are aware of fixed, cost plus pricing and can easily identify inconsistencies between items or SKUs (Stock Keeping Units). It is common procurement practice to cherry pick prices by line item to avoid overpriced items, look for bargains (i.e., under-priced high value items) and negotiate further reductions and discounts to drive prices lower across all lines of business.
A more sophisticated approach to the price setting process is value-based pricing. High performing B2B pricing teams argue that understanding customer value drivers (not just cost drivers) and price sensitivities by product or services and across segments is what drives profitability and value for businesses and customers.
Key value-based questions pricing teams ask are: Why do our customers buy from us, and what role does price play in articulating the value we offer to our customers? What’s are share of wallet across different brands and products?
Conclusion on what is pricing
Understanding customer value drivers for hard material goods as well as supply constrained commodities allows B2B pricing teams to educate customers on price, how to buy and, most importantly, co-create viable commercial pricing options aligned to their customers businesses goals and financial targets.
Your pricing process will help you set and get the right prices to drive profitability. But pricing in a vaccum does not work – you need to think about your business and revenue models too.
That’s why you need to understand what pricing is first and then think of how you are going to improve pricing in your business.
If you don’t know the role of pricing, how are you going to build the right structures and capabilities to support the business achieve its goals and financial targets?
Choosing the right approach shouldn’t revolve around whatever’s hot, expensive, or otherwise appealing at a given time.
You need passion and expertise for pricing to drive profitable sales and outcomes.
Start by conducting some research into customer pricing and the competition.
You might also consider approaching from an innovative standpoint.
Look beyond category and focus on solving your potential customers’ pain points.
Don’t forget to look around you and and track recent and long-term trends.
Look out for our subsequent fact-filled articles as well. We will be covering some key concepts in the specialised field of pricing and revenue management.
Together they present an insight into the disciple, showing not only how, but why the process of pricing is fundamental to building an agile pricing organisation.
What pricing approach most appeals to you?