The Price Isn’t Right
April 24, 2018 | NEWS
Is your B2B company failing to reap the rewards of a smart pricing strategy?
Let’s say that business at your corporate software company is booming, with healthy margins and revenue growth. Not much more that can be done to improve things, you might think. Might as well kick back and relax. You’d be wrong.
With 20+ years’ experience working in B2B strategy, OC&C often finds that pricing is one of the most neglected factors of business operations, even though it has more impact on profitability than pretty much anything else.
Low costs shouldn’t necessarily mean low prices
Putting up your prices by just 1% can result in a 3-4% leap in operating profit; a multiplier effect that’s definitely worth setting in motion, even if growth is already healthy. At OC&C, we have seen revenues jump by 10% and profits by 30% or even 40% after we have helped companies discover their optimal pricing structure.
Smart pricing strategies are most often overlooked by businesses with low or non-existent marginal costs, like software or information companies. When it’s free to duplicate your product, any profit looks like a good profit, and the path of least resistance to close deals is to be generous with discounts. This is particularly the case in B2B environments, in which sales reps are often free to negotiate bespoke client deals, and pricing can be opaque or not publicly available.
How to spot a pricing problem
Our experience in B2B pricing suggests some common symptoms of sub-optimal pricing strategies:
- Selling the same products to similar customers at wildly varying prices, with some paying twice or three times as much as others
- “One size fits all” rate cards, with no segment-specific pricing. Different segments value different attributes and have different price sensitivities. In the absence of segment-specific rate cards, sales teams liberally use discounting to guess the right price.
- Lack of a choice architecture, offering products that are “good”, “better” and “best”. This three-tiered pricing structure allows value capture of customers with premium needs while offering lower cost options for more sensitive segments.
- Pricing metric not linked to fundamental customer value drivers
- Sales team incentives linked to increases in revenue, rather than profit
- Sales decisions reliant on ‘gut’ rather than data, processes and tools
- Pricing governance that is poor or non-existent
Knowing your price means understanding your customer
A successful pricing strategy is the fastest and most effective way to boost your bottom line. It is well worth the effort of finding out exactly what clients are willing to pay for the added value that your product provides, compared with competitors.
Listen to the voice of your customers to understand:
- Which attributes are most important and thus drive most value?
- How well is your product or service delivering against those attributes?
- Consequently, how are your prices perceived?
- What factors are important in shaping this perceived value? Context is important
- How do customers perceive competitor prices?
- Can your overall market be broken down into segments, with certain groups prioritising certain values, such as affordability or a premium service?
Careful market research often reveals misconceptions within the company about what customers actually think, feel and want. You may be surprised by some of your findings.
The fine details are as important as the big picture
Once you have a thorough understanding of what your customer is willing to pay for, and at what price, you can then fine-tune your discounting schemes. These should be considered with microscopic focus, using data processing and the appropriate tools, with proper governance and performance management. Data analysis beats gut instinct every time, and sales managers shouldn’t be coming up with these figures for discounts and incentives on the spot.
While this research will help fine-tune your company’s price positioning, it can also help you create a strategy for building a product or service that customers can’t live without — and are willing to pay a premium for.
Remember that higher prices can help reinforce perceptions of your company as the high-quality option, which is positive for both competitive differentiation and your bottom line.
Pedro Sanches is a Partner at OC&C Strategy Consultants
Henri-Thierry Toutounji is a Partner at OC&C Strategy Consultants