Deconstructing a long-standing myth in B2B markets, namely that companies have little wiggle room in setting prices for their products and services because prices are imposed by the market; it’s the law of supply and demand. This myth is particularly insidious because it creates a reluctance on the part of CEO’s to leverage pricing as a key lever in improving company performance.
First of all, it’s important to note that this long-standing myth is also relatively pervasive; it is not limited to certain industries nor by geography nor by company size. Furthermore, the myth has been reinforced in the last decade by several market-driven factors as noted by Matthew Harrison1 in, Value Marketing & Value Selling in B2B Markets, an article2 published on the B2B International web site: “The worldwide financial crisis, cheap Asian competition and the rise of online marketing and commerce have made most markets more competitive than ever and put huge pressure on margins. In many businesses the response to these challenges has been one of resignation – an acceptance that prices have to be reduced, margins squeezed and businesses less profitable.”
The roots of the myth, exacerbated by these factors, can be traced to three distinct but related phenomena:
Lack of faith by management in the ability of the sales force to confront and win pricing battles against well-equipped, highly informed procurement specialists. Sure, a sales person can win deals by lowering prices, but that is certainly not a viable, profitable long-term strategy. As noted in an article3 by the consulting firm Oliver Wyman, Surprising Opportunities in B2B Pricing : “As a result, prices are hard to explain and justify, particularly when comparing different products, customers, geographies, and transaction types. Prices often seem to be based on gut feeling, instead of analytics and a customer’s willingness to pay.”
In the field, more junior, less experienced members of the sales team are frequently tempted to price aggressively to win a deal even if it means leaving money on the table. Similarly, sales reps will often be motivated to hit some volume or revenue objective while ignoring any consideration of the profitability of the deal. A poorly structured compensation plan may have a role to play in reinforcing this sort of undesirable behavior.
Underselling could also be ascribed to the sales team’s lack of discernment about what the customer needs really are. As Matthew Harrison suggests: “Emboldened by their access to the customer and driven by short-term targets, b2b salespeople frequently misunderstand, oversimplify and miscommunicate customer needs.”
Ultimately, the sales force needs to be continually informed of the value proposition of the products/services they are selling. In parallel, they need to be equipped with an effective pricing tool and monitored to ensure adherence to its pricing guidance, otherwise management’s sense of powerlessness relative to market forces will become a self-fulfilling prophecy.
As the firm Oliver Wyman further notes: “Companies today are wary of raising their prices above industry inflation levels, given customer resistance to hikes in prices. But price increases may be more palatable if they are tailored to individual products and customers, and are based on strong analytics, enabling salespeople to justify the increases.”
Incorrect categorization of products, and to a lesser degree services, as commodities. In a pure and perfect market, the pricing of actual commodities is, in fact, subject to market forces: that is no myth. But in reality, many products/services in the B2B space are not commodities; rather they display clear factors of differentiation which justify higher than market prices, at least in customer segments where those factors of differentiation are tangible, meaningful and deliver real value. For this to work, the sales force needs to be informed of these value advantages so that they can defend them and thus feel more comfortable selling at the just price.
As Matthew Harrison notes: “Since 2007 we have seen the polarization of many business-to-business markets: the minority of price buyers are more price-focused than ever; simultaneously the majority of the market – value buyers – are more discerning than ever, with elevated needs based around service, brand and consultancy.”
A pricing tool that can inform decisions on profitable pricing by segment will go a long way towards helping the sales organization profitably win those battles against procurement specialists.
Complexity of selling (and therefore pricing) in B2B primarily driven by limited transparency on prices and the strategy of the competition. And the degree of complexity is only increasing over time. On the other hand, tools for measuring costs and profitability have not at all kept pace; they’re often nothing more than ‘analytical accounting’. In underestimating the cost of complexity, companies are left with a truncated view of profitability by product or by customer. As a result, long runners, simple products and ‘easy-to-satisfy’ customers often are wrongly burdened with some of the costs of complexity related to small orders, urgent shipments and elevated service requirements by the most demanding customers.
The consequence of this limited view: CEOs are either unable to define an effective pricing strategy or simply default to the pressures of market prices to the detriment of the company’s profitability.
A first step for CEOs will be to acknowledge that pricing is an important lever in their company’s “success toolkit”, that even small improvements can quickly generate important gains in profitability and that pricing is a process which needs to be revisited and updated regularly as their company and customers grow and evolve over time.
Our “technology take” on this situation: beyond taking the usual steps to select and implement a structured, intelligent, real-time decision-support tool, CEOs need to ensure that the chosen tool includes advanced price/margin analytics as well as integrated, in-depth cost intelligence capabilities. The upside potential can be translated into an increase in margins of 3 – 6 points.
Notes:
- Director, B2B International, a market research firm specialized in B2B marketing
- Article published on the B2B International web site: Value Marketing and Value Selling in B2
- Article published on the OliverWyman web site: Surprising Opportunities in B2B Pricing
