In an expanding market, organic growth and a steady supply of new customers will often provide a healthy cash flow and revenue growth even if one’s market share remains unchanged. The B2B pricing concerns during a business growth phase comprise; balancing inflationary pressures, growth of market share and price positioning for re-investment decisions.
B2B pricing tactics that deliver improved cash returns shouldn’t be complex. However, business complexity often disguises the depth of value creation opportunities hidden beneath the surface. Often the sheer breadth and complexity of customer pricing conditions will disguise an erosion of operating margins. Transparency is imperative:
1. Good Housekeeping
The key to good price housekeeping is transparency. By stripping out pre- and after sales discounting and identifying hidden costs the real pocket price is made transparent. Comparison of this pocket price across different customer parameters such as customer purchasing power, geography, degree of bundling etc., will reveal outlier customer/price combinations. Investigating these outliers will often reveal historical pricing anomalies that would have remained hidden if stated price was accepted at face value. Addressing such pricing anomalies will raise the bar for price approvals and help to educate Sales personnel on the hidden impact of price complexity and discretionary discounting.
2. Terms and Conditions
The old adage ‘Turnover for vanity, profit for sanity and cash for reality’ is always true. Access to cash remains difficult despite combined economic stimulus packages of qualitative easing and low interest rates. However, these same low interest rate conditions, where the profit motice for withholding cash from your suppliers is historically low, provide favorable conditions to address excessively long payment terms. Whilst driving down customers’ payment terms may not significantly reduce loan maintenance costs, it will improve a business’ credit worthiness and will provide a valuable negotiating weapon in an upturn when customers are prepared to accept higher prices in return for more flexible payment terms.
3. Customer Segment-specific Pricing
Employing pricing housekeeping and addressing excessively long payment terms provide the easy wins. Customer value benchmarking and customer segment-specific pricing provide price significantly greater value creation opportunities, but they are more challenging to uncover. In B2B sales it is the supplier attributes, such as delivery reliability, ease of transaction and after-sales support that play a biggest role in the customer’s buying decision, bigger even than the product attributes. By segmenting customers according to their key buying factors i.e. the attributes they most value in their suppliers, it is possible to assign different pricing targets for the same products and services according to the market served.
The challenge comes in quantifying what value different customers assign to the different supplier attributes. Some more transactional attributes, such as supplier reliability, can be readily quantified by knowledge of cost drivers witin a customer segment. Other attributes in customer value hierarchies, such as the value placed on branding or in relationships as an assurance of quality, are more challenging but can be quantified through an independent market survey. The good news is that knowing the price sensitivity of customers segments allows prices to be raised selectively at relatively low risk. Also, barring significant changes in ownership, customer value hierarchies do not change significantly over time so meeting the particular needs of different customer segments means that the price premium can be maintained.
4. Customer Value Benchmarking
When pricing products and services many companies first use a “cost plus” approach to arrive at a price giving the desired ROI and then adjust their pricing expectations – usually downwards – to accommodate for the price positioning of competitive products on the market. This pricing approach is easy to follow but always delivers lowest common denominator pricing, which devalues the offer and encourages a race to the bottom. In a stagnant or declining market, pricing tools that help companies to maintain their price positioning and avoid a price war are incredibly important.
In their recent article “Implementing strategic B2B pricing: Constructing value benchmarks” Bradley T. Gale and Donald J. Swire introduce the concept of customer value mapping. Customer value mapping is a price positioning tool that links performance scores and existing market pricing to provide an outside-in method of benchmark pricing. Gale and Squire argue that B2B customers tend to categorise a product offer according to:
- Product features.
- Vendor service capabilities
- The customer-supplier relationship.
- Supplier’s reputation in the market.
In other words, customer buying teams simultaneously choose a product – using objective factual criteria that can be ranked and weighted – and a supplier. Interestingly, it is the supplier attributes – mainly a matter of client perception – which has the biggest influence on the buying decision.
Suppliers can therefore maintain a price premium with some B2B customer segments when the supplier performance differential is successfully communicated. The Customer Value Maps work by comparing weighted product and supplier attributes of competing product offers against their market price. The Customer Value Map then identifies products that are over- or under-priced according to the composite performance index. The positive (or negative) cash surplus from the benchmark price for a product’s composite performance index can be calculated but should be validated through interview or market studies to correct the ranking of performance attributes before implementing price adjustments. For the all-important supplier attributes, Customer Value Mapping can identify when customer service attributes should be better communicated and/or enhanced relative to the competition to improve the value perception of the offer in target customer segments.
Call Pennog on +44(0)1484 443001 or contact us using our easy contact form for support simplifying your pricing approach and help in calculating the real monetary value of your offer relative to your competitors and for the different market segments your business serves.