3 Things to Consider When Setting Up Your B2B Pricing Methodology
While it’s true that setting B2B pricing can be tricky and puzzling, it’s also a fundamental decision every business owner must make in order to build a strong foundation for their company.
One of the first questions business owners typically ask themselves when establishing pricing for their products or services is, “Is it too high or too low?”. If you’re a business owner, you have likely spent many days and nights wondering this very thing.
Yes, the often-unbearable dilemma of pricing is an integral part of every wholesaler’s agony and stress. And the agony is indeed justified—especially if you take into consideration the fact that pricing is literally the only element in the business marketing mix that produces actual revenue.
An effective B2B pricing methodology is critical to staying competitive in today’s globalised markets where you’re up against wholesalers and distributors from virtually all around the world. When establishing your pricing strategy, you need to consider many different factors. For example: Does the price reflect the product’s value? Do you opt for lower prices in order to beat your competition? Do the prices leave room for discounts and/or exclusive offers for VIP customers? How do you go about pricing custom products?
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you must have a prayer session before raising the price by 10 percent, then you’ve got a terrible business”, Warren Buffet, renowned business magnate and guru, once stated.
If you want to avoid prayer sessions, panic attacks and dollar-related fixations while setting up your B2B pricing methodology, we’ve got some advice to help.
3 Tips for Establishing an Effective B2B Pricing Strategy
1. Beyond price: Deciding on profit
When it comes to pricing, you need to answer one fundamental question: “How much profit do you want to earn for each product you make?” Successful B2B companies usually create a pricing structure that allows them to inflate their profits per product and per customer.
If you price your products too high, you might lose sales, and if you price your products too low, you may not be able to convince your customers of their quality and worth.
To create the ideal pricing structure, there are several variable elements you need to consider:
- the cost of your products
- your labour-related costs
- shipping and packaging costs
- the market you’re selling to
- your competition
- the type of customers you want to reach
2. The right price: Key variables to consider (product, market, customer)
To establish the optimal price for a product, there are many variables to consider. Some of these variables are changing, like local economies, but there are three variables that should always be integral to your pricing strategy: your product, your market, and your customer.
What type of product is it? Commodity products are usually priced differently than custom or premium products. They also have lower profit margins than select and first-rate goods (and first-rate goods tend to be more price sensitive). In other words, different types of products have different pricing nuances and sensitivities.
When establishing a price for a product, be sure to first evaluate the category your product falls under. As such, your pricing decision should be based on whether the item is a commodity or a necessity, and whether it’s premium or custom.
What is your market? Do you sell your products in one or more countries? What industry do you operate in? The answer to these questions is vital when it comes to determining the pricing of your products.
First, consider where your products and brand stand in terms of your competition. In some markets, a change in pricing made by the industry leader may impact the prices for all market players.
Your B2B pricing structure may also be influenced if your products are the ones raising the bar in terms of the usual industry standards, or by the general economic environment and needs of the local markets you operate in.
Who is your customer? Yes, it’s true! Your customer base also influences your pricing strategy. How? Every customer has individual specifications and expectations, as well as a unique perception as to the value of your brand and your products. In fact, customers who think highly of your brand and who share a strong connection with your B2B company are less price sensitive than customers who are new to you or who are not as familiar with your product line.
Apart from the relationship your customers form with your brand or products, surveys state that order volume also plays a big part in how your customers react to your pricing strategies. For instance, large volume customers tend to be more price-sensitive than smaller volume customers. In this respect, you may want to create different price tiers for different customers or consider discounts tailored to customers who usually buy in bulk.
3. Value: Aligning customer expectations with your pricing
Are your products manufactured with a special set of skills? Are your products industry-game-changers and innovative? Do offer the best value for the money ratio in the market? Much like B2C customers, B2B buyers also make their decisions based on the perceived economic and emotional value of your products.
If you use value-based pricing, you price your products based on the value customers put on it. To do this, you need to have a deep understanding of your customers’ best alternatives, and you also need to know the prices of those alternatives for every single product you offer in order to truly capitalize on your competitive edge.
Keep in mind that value-driven customers are less price sensitive than buyers who have no emotional attachment to your brand or products. In this respect, you need to match your customers perceived economic value to your pricing methodology.
Getting pricing right: From methodology to strategy
To set your business up for success, you need to contemplate many things, including your market, your customers, your labour costs, your product niche, and the market’s value-based perception of your products. Inefficient pricing costs B2B companies millions in recurring revenue each year. It also affects sales and customer satisfaction.
There’s no golden rule when it comes to pricing, so choose the methodology that best suits your business cycle and make sure the functionality features of your B2B eCommerce platform reflect your pricing strategy. Establishing product pricing may seem like a daunting challenge, but the effort you put into it will create a solid foundation for success.