An efficient B2B pricing strategy is critical to staying competitive in today’s business-to-business (B2B) markets, where you face low-cost competitors from all over the world. Inefficient pricing can compromise revenue, sales and customer satisfaction. Yet too many B2B companies get caught in the trap of reacting to cost and competition pressures instead of proactively facing negotiations with a compelling value-based B2B pricing strategy.(1,2)
Why you want to learn value-based pricing
Value-based pricing creates higher profits compared to cost- or competition-based pricing, according to leading practitioners and researchers at top business schools. Done right, your value-based B2B pricing strategy can come close to the precise point of the customer’s willingness to pay within the context of the competitive landscape and the financial consequences. On top of this, engaging with customers in this way can lead to breakthroughs in innovation that build stronger customer relationships. This integrates your longer-term marketing strategy as it can provide you with extra value needed to position your company at premium prices.
How to get the focus onto the value and off the price
When your customer wants to know about the price, what they really want to know is the value – even if they don’t know that yet. With an effective B2B pricing strategy you respond to this by understanding their need and communicating your value in meeting that need. This is a departure from old tricks of the B2B sales and marketing trade like calculating costs of production and adding markup (cost-based pricing) or setting your prices in relation to your competition’s (competition-based pricing). Instead, with value-based pricing, you – clichés are often true – put yourself in the customer’s shoes. Through business coaching and skills training including pricing psychology, value-based segmentation and pricing elasticity, you can learn to communicate the differentiating value of your offer.When you transition to a B2B pricing strategy, your product or service is no longer interchangeable with those of your competitors because it meets the customer’s specific needed value.
Avoid getting commoditized
Pricing excellence cannot be achieved if you focus solely on costs or competition. It can be tempting, it must be admitted, to fall back on these sales and marketing methods because the data is easy to obtain and simple to calculate. Unfortunately, cost- and competition-based pricing are ultimately inefficient B2B pricing strategies(5).
Cost-based B2B pricing strategy offer simplicity since you already know how much your product or service cost you to create and how much you feel you should profit. However, you will either eventually turn customers off with prices that are too high, or you will find yourself frustrated with margins that are too low.
In competition-based B2B pricing strategies, you need to also account for the market competitiveness, but once again, the data is practically at your fingertips. Unfortunately, when you base your B2B marketing strategies on what the competition is doing, someone else will always come along with a lower price. Get caught in that, you’ll get commoditized and ultimately undersold.
In both cases, your relationship with the customer is skin-deep at best. Your offer is a commodity, not particularly distinguishable from the competition. You are continually subject to competing objectives of different stakeholders – being pulled in multiple directions. Cost- and competition-only are not only weak B2B pricing strategies, they also impede the integration of relationship-building into your marketing-strategy plan, to enable deeper value creation and pricing excellence.
Overcoming obstacles to pricing excellence
No one said it was easy to reach pricing excellence through value-based propositions. This process can involve additional costs to design and implement. An efficient B2B pricing strategy must of course be informed by business costs, competitors and value. However, it is by perfecting your value-based strategies that will help you create a sustainable B2B relationship enabling both you and your client to grow and adapt to market changes with consistent pricing excellence.
Effective pricing strategies require gathering deep insights into your customers and knowledge about the economics impacting your company. A good means of perfecting your B2B sales and marketing skills and strategy is through executive education. A top business school course in B2B pricing strategy can demystify pricing excellence, whether on-campus or through distance learning.
Studying B2B pricing strategy offers an opportunity to take stock of your business value, identify gaps in your B2B pricing strategy, and hone skills for aligning your value proposition. This includes training your skills in price management and pricing psychology, and learning to better identify price elasticity and feasible value-based segmentation. Alternatively, you may consider improving your B2B strategy skills with a marketing management program, which will offer similar tools, with a particular focus on ensuring you are part of the solution in terms of the customer’s perception of value. Either way, executive coaching can be leveraged to improve your communications and negotiations skills. When you develop the skills for pricing excellence, you’ll be able to create an action plan to secure your company’s profit margins through an improved B2B pricing strategy.
1) Kühn, R., and P. Pfäffli. “Wie Unternehmer die Preise erhöhen können.“ New Management, Vol.6, 2007.
2) Kashani, K. "Fighting commoditization: Strategies for creating novel customer values," Perspectives for Managers (IMD). 2006
3) Karsenti, G., & Ulaga, W. Le business model des services (Paris: Editions d'Organisation).2009.
4) Michel, S., Brown, S. W., & Gallan, A. S. (2008) "Service-logic innovations: How to innovate customers, not products," California Management Review, 50(3), 49-65.
5) Nagle, T.T., and J.E. Hogan. Strategie und Taktik in der Preispolitik, 4th Ed., Munich: Pearson Business, 2007
6) Hinterhuber, A. “Customer Value-based Pricing Strategies: Why Companies Resist.” Journal of Business Strategy, Vol. 29, Iss. 5, 2008.