B2B pricing: How to triangulate the perfect B2B pricing structure
Jan 12 2021
Selling to other businesses is a different ball game than selling to consumers, and requires different strategies across the entire gamut of decisions you'll be making. One of those differences in the pricing strategies that you employ. If you're struggling to decide how your B2B products or services should be priced, this post will help demystify the issue for you. We'll talk about the differences between B2B and B2C pricing, some common B2B pricing strategies, and give you some tips to get the perfect price for the goods and services you sell.
Pricing is the strategy for setting prices on goods and services that your customers will pay for. For B2B pricing, the goods and services in question are marketed towards other businesses, with those businesses making up the customer base. This differs from B2C pricing, where the customers are consumers. To understand the differences further, let's look at the two in greater depth.
How is B2B pricing different from B2C pricing
Businesses and consumers behave differently in the marketplace, and the pricing strategies employed for each of them must adapt to that differing behavior. There are two major ways that B2B pricing strategies need to be differentiated from B2C pricing strategies if they are going to be as effective as possible:
B2B pricing often varies by customer
Sales to consumers are almost always uniform in pricing. There are some exceptions. For example, consumers will often negotiate the price of expensive items such as automobiles. In the business world, prices are negotiated much more frequently than they are in the consumer world. Businesses are likely to be frequently dealing with highly-priced invoices. Whether these higher prices come from a small number of expensive products or bulk purchases of cheaper products, the tendency to negotiate down is ever-present in the B2B world.
B2B pricing is more complicated than B2C
Consumer pricing is fairly easy. The consumer decides for themselves whether they would like to purchase a product based on the price it is offered for, which is almost always displayed transparently throughout the process. B2B pricing is more complicated. There are often many people involved in the buying process and a chain of command that must be followed before a purchase decision can be made. This is complicated further by the fact that pricing is very often not as upfront and transparent as B2C pricing is, for the reason mentioned above.
4 pricing strategies used by successful B2B companies
Now that we've discussed how B2B pricing strategies are different from those of B2C, let's discuss the strategies themselves. There are a number of strategies that businesses may employ to price their products when selling to other businesses, but the four listed below are the most common choices. Let's go over each of them and discuss the reasons a business might want to choose, or avoid, a particular pricing strategy.
1. Cost-plus pricing
Also known as markup pricing, cost-plus pricing is one of the more simple pricing strategies out there. With this strategy, the cost to produce a good or service is calculated. This means adding up the materials, labor, and overhead required to produce one unit of the item. After that, a fixed markup percentage is added on top. For example, an item that costs $10 to make and had a 50% markup, would sell for $15. Because this is such a simple pricing model, factors such as competitor pricing are not considered when calculating it.
Cost-plus pricing is simple to calculate and makes it easy to be transparent with your customers about why a product costs what it does.
Because the markup is consistent, you can expect a consistent rate of return from sales of the item.
In the B2B world, where negotiations are common, it is easy to offer lower markup to businesses who wish to negotiate better prices.
For businesses such as SaaS, the cost to produce a product might not be very high, making cost-plus pricing much less attractive.
Automatically raising the prices by a certain amount can also reduce the impulse to reduce manufacturing costs, since any increase and costs are offset by an increase in markup.
Because competitors are not considered, it is easy to overprice your goods and services with this pricing model.
2. Value-based pricing
With cost-plus pricing, it is easy to price your product too high, but also easy to leave money on the table. Value-based pricing seeks to avoid those problems by charging based on what the value to the customer is. More directly, value-based pricing charges what the business thinks the customers would be willing to pay for a product. If the calculation is correct, this makes for a very efficient pricing strategy.
It can be easier to penetrate a new market and compete with other businesses when you choose value-based pricing over cost-plus pricing. By charging what customers are willing to pay, you avoid both turning customers away and selling yourself short.
Because it is possible to increase the perceived value of a product, you can increase the amount of profit you'll be able to make off of each item by taking steps to improve the perception of your brand.
Calculating the perfect price for a value-based strategy is difficult and can take time to gather your customer intel. No magic button tells exactly what the majority of your customers are willing to pay. This is especially true when you are just starting and don't have the benefit of past sales data to draw from.
While you do have some control over the perception of value, the market can also be very fickle. In some businesses, you may find that your pricing isn't very stable as you constantly need to adjust to changing market forces.
3. Competitor-based pricing
In some cases, you can let your competitors do the hard work of finding the best value-based price for you. Competitor-based pricing works by gathering the prices of all your competitors, averaging them, and then deciding whether you want to go a little higher or a little lower. As long as most of your successful competitors have gotten the pricing strategy right, you'll always be in the ballpark as well.
Next to cost-plus pricing, competitor-based pricing is the easiest of the models to understand. It requires no guesswork and mathematics is no more complicated than what we all learned in grade school.
By pricing similar to what is already on the market, you eliminate the chances of scaring customers away with a price that is too high and reduce the chances of selling yourself short with one that is too low.
Competitor-based pricing adjusts for the market in much the same way that value-based pricing does, but without the complexity.
Although you reduce the chances of selling yourself short, you don't eliminate it. In fact, if your products become exceptionally popular, competitor-based pricing will not adapt to that and you'll be leaving money on the table.
For competitor-based pricing to be successful, you need to have a value proposition that is almost identical to your competitors. Any distinguishing features, or lack thereof, with your product, will be ignored in this model and can result in inaccurate pricing.
4. Dynamic pricing
Dynamic pricing seeks to take into account all the factors that may affect what consumers will pay at any given time. This includes supply and demand, competitor pricing, and any other data you can find to feed the algorithms. With modern machine learning, predicting the optimal price at any given time is much more accurate than it was in the past.
Dynamic pricing is the ultimate in responsive pricing. With this model, your prices will always reflect what the market is doing at any given time.
Because dynamic pricing is often calculated with algorithms, it saves time manually calculating your price points and allows your business to take fully advantage of automated pricing.
Big data have empowered much finer grain analysis that wasn't possible before, making dynamic pricing powered by machine learning highly efficient. The result is maximized profits over traditional methods.
With dynamic pricing, you must be willing to continually change your prices. This can be off-putting to customers who expect more stable pricing. It also makes the strategy impractical for subscription-based services.
Dynamic pricing is the least transparent of all the options. With the number of variables that go into pricing and the black box of the algorithms involved, even you won't know exactly why your products are priced a certain way.
Best practices to nail your B2B pricing
So with all of these choices, how do you know which one is best for your business? Finding the perfect pricing model and then refining that model into the perfect price point, takes a bit of experience and a fair amount of work. Still, there are some tips that you can use to reduce the guesswork and get to the right pricing more quickly.
Test out multiple pricing structures
You can't just assume that the first pricing strategy you pick will be the winner. Experiment with different pricing structures until you find the right one.
Target your pricing structure towards personas
Your marketing department is likely already to have a set of buyer personas worked up. These buyer personas can also help you determine what your particular customers will be willing to pay.
Get input from your sales team
Beyond the fictionalized personas, your sales team works directly with your customers. They know them well and can give you insight into what they will be willing to pay.
Base your pricing on solid data & analytics, not conjecture
Even if you don't use dynamic pricing, that doesn't mean you can't take advantage of the same types of analytics and algorithms to help you set your initial prices. Big data is a powerful tool. Use it.
Account for leakage
Failure to account for common causes of leakage can result in pricing that makes you less than it should or even pricing that costs you money.
Pricing is just one part of B2B growth, ProfitWell solves for the rest
The game is only just beginning once you've got your pricing right. Actually growing your business requires more work and more data. With our free ProfitWell Metrics solution, you'll have all the data you need to make intelligent decisions about your business and identify problem areas that are preventing your growth. Track and improve key performance indicators such as churn, and monitor how good of a job your customer success team is doing at keeping customers happy.
To take things a step further, ProfitWell's Retain will help you reduce churn, even more, using state of the art algorithms that help you retain more customers and win back ones you've lost due to a failed payment. With ProfitWell Recognize, you'll enjoy audit-proof revenue recognition that will save you time and money. Finally, if you still don't feel you've quite got your pricing right, our Price Intelligently service will use a combination of powerful machine learning algorithms and our many years of experience to find you the optimal price point.
Pricing is perhaps the most important factor in the success or failure of your business, yet for many businesses, it is nothing more than an afterthought. If you take the time to understand your customers, your market, and your pricing strategy, you'll already be giving yourself a leg up on the competition.
By Danette Acosta
Editorial Lead at ProfitWell, helping ProfitWell take its content to the next level. When she's not busy creating dope content, you can listen to her on the radio.