The Complete Guide to B2B Pricing
Can you believe that 80% of B2B companies feel their pricing strategy needs improvement?
We hardly could either, but it’s true. Despite the fact that just a 1% price optimization improvement can yield an 11% profit increase, many companies are admittedly not prioritizing their pricing strategy.
Our guess? The complexity of the process gets in the way. But it shouldn’t. Ineffective pricing means your company is risking lost revenue and lower customer satisfaction.
If you know your company needs a better pricing strategy and you’re not sure where to start, you came to the right place.
Read on for a complete guide to B2B pricing.
- Value-based, competitive, and cost-plus are the three most common B2B pricing strategies.
- Value metrics, pricing models, and buyer personas set the framework for choosing a pricing strategy.
- Surprise fees, low-price tunnel vision, lack of customer segmentation, and ignoring competitors are common mistakes made in the B2B pricing process.
Common B2B Pricing Strategies
First thing’s first: what even is a pricing strategy? In short, it’s the method by which you determine the price of your product or service.
There are three common pricing strategies used in B2B sales.
We’ll start with the most complex of the three because it’s also widely regarded as the best option — when companies are able to implement it effectively.
Value-based pricing is about the actual and perceived value of your product. This value depends on several factors, including customer segment, competitor pricing, and brand reputation in the industry.
A man is getting ready to buy a new car. When he gets to the dealership, he’s shown two options.
First, a used sedan that’s a few years old, has some wear and tear, but is in great driving condition. The price is a total bargain.
Next, a brand new convertible sports car. It costs more than a good down payment on a new home, but it has top-of-the-line features inside and out.
Which car will he choose?
Of course, it depends. To know the answer you’d need to ask a ton of questions about who this man is, how much money he has, and what he cares about (i.e. what he perceives as valuable).
That’s the simple foundation of value-based pricing.
In practice, things get a little more complex. Implementing a value-based pricing strategy requires significant research into your target audiences and market landscape to understand the real and perceived values of your product.
Using a data-driven approach, you’d then assign a value-based price to your offerings. But even with data to support your decision, this strategy can be quite nuanced and always a bit subjective. It takes experience and industry expertise to determine an accurate value-based price point.
There’s a lot that goes into this final determination. Take Marketing Journal’s B2B Value Pyramid, for instance, which includes 40 contributing factors to perceived value.
Competitive pricing takes customer value out of the equation and focuses totally on the pricing of other competitors in the market.
If that sounds simple, that’s because it is.
Basically, competitive pricing is like taking a classroom full of elementary school students and telling them to line up tallest to shortest. The tallest kids get to be in the front of the line just because they’re tall, which is fine on the surface because the lineup is easy to understand and it follows a clear line of thinking.
But it doesn’t really tell you much about each student, and even their height order can’t totally be trusted.
In fact, if you took the time to line up these same students in a few months, the order might be different. Some kids might be at the front of the line right now because their growth spurt arrived earlier, but long-term their height will fall right in the middle. Some might have platform shoes on, so their position in the line isn’t even accurate.
Just like this height lineup, using a competitive pricing strategy means your place in the market is relatively straightforward and easy for customers to understand. It’s a low-risk approach and can be a good option when cost savings is the top priority for your buyers.
But it’s also potentially inaccurate. When you position your company on competitive price alone, you’re not really looking at the value comparison. You’re also trusting that the way other companies positioned themselves is accurate, when really they might just be wearing platform shoes.
Cost-plus pricing is the simplest of the three most common B2B pricing strategies.
It’s sort of like the word problems on your third-grade math test:
Suzie is selling necklaces. She wants to make a $1 profit per necklace. If it costs Suzie 75 cents to make each necklace, how much does she have to charge to make her desired profit?
If you answered $1.75 (we sure hope you did), then you understand cost-plus pricing.
But just in case: cost-plus pricing means totaling the costs of producing and delivering a product, then adding a profit margin to arrive at your final sale price.
Like competitive pricing, cost-plus pricing is easy to determine. It also covers your expenses and produces predictable revenue numbers. Cost-plus pricing is a decent option for companies who have limited resources or who are just starting out and have no customer data to lean on.
But a cost-plus pricing strategy not only leaves out customer value as a determining factor, it also ignores market competitors and can potentially result in arbitrary market positioning.
Comparing the Options
All three B2B pricing strategies have their pros and cons, and there are situations where a cost-plus or competitive strategy is the most practical option. But there’s a reason value-based strategies are generally considered the most effective.
Here’s a good overview of the benefits of a value-based strategy compared to the two simpler options:
Choosing Your Pricing Strategy
Here’s what to consider when you’re deciding which strategy is right for your company:
Know Your Value Metric
Your value metric is how you measure your product’s per-unit value, and ultimately one of the main factors in how you arrive at an actual price. If you’re selling a straightforward product — say, pencils — your value metric would be per pencil. If you’re selling a consulting service, your value metric would likely be per hour.
Decide on a Pricing Model
Value metrics also help you determine your pricing model. Your pricing model depends on whether you’ll charge one price for a product or different prices based on product packages or levels of service.
Your pencils, for instance, would likely follow a flat-rate pricing model (every pencil or pack of pencils costs the same amount). Consulting services, on the other hand, may require a tiered pricing approach where buyers can decide on the level of service they need and be priced accordingly.
Utilize Buyer Personas
Buyer personas can be used to determine the price buyers would be willing to pay for your product. A customer purchasing a high-volume of office supplies (like your pencils) is likely to have cost savings at the top of their priority list.
A large corporation purchasing an enterprise-wide software system and consulting service is likely to put more focus on value and relationships, then worry about price as one of many contributing factors.
Consider all Factors
Once you know your value metric, pricing model, and buyer persona, you have the framework in place for deciding on the pricing strategy.
Some recommendations for making a decision:
- Decide what’s most important for your company. A value-based strategy might be considered the holy grail in the B2B world, but if your product and business model are simple, a cost-plus or competitive approach could work for your company.
- Build a cross-functional team to contribute to the discussion. Your marketing, sales, and accounting teams are all going to have different perspectives, and the right strategy decision usually lies somewhere in the middle.
- Be flexible. Monitor your results and adjust your pricing strategy when necessary. Don’t stick with a strategy that’s not working just because you decided on it in the past.
What Not to Do: B2B Pricing Edition
Always Aim to be the Lowest
Don’t get stuck playing price limbo with your competitors — it’s not always about how low you can go.
Competitive prices are part of a comprehensive pricing strategy, yes. But they’re not the whole story. Don’t sacrifice assigning a fair price that aligns with the value of your offerings just for the sake of landing lower on the price scale than your competition.
Instead, be compelling about the added value that comes along with the higher price so that potential buyers understand that by paying more, they’re getting more.
Fail to Segment Your Customers
B2B offerings often include a wide range of products and services, and packages differ based on individual customer needs. That means prices will vary, too.
Don’t lump all of your customers into one pricing category. Instead, consider your buyer personas, their unique needs, and their budgets. Put together packages that align with those factors and offer options to your buyers.
Don’t ignore competitor pricing, even when you don’t think it’s critical to your pricing strategy. Instead, know their value propositions and how they stack up with yours — and that doesn’t always mean thinking in terms of better or worse.
No two companies — even those in the same industry and with very similar product offerings — are exactly alike. Find out what makes your company and your products unique, and be ready to talk about it with your potential buyers, including how those differentiators contribute to price differences.
Leave Surprises Waiting
Have you ever booked a flight with a budget airline only to arrive at check in to face exorbitant baggage charges? Before you knew it, your extra carry-on bag cost about as much as the more comfortable plane ticket you passed up in the name of getting a bargain. It’s annoying!
Nobody likes surprises when it comes to making a purchase. When you tack on additional fees later in the buying process without mentioning them first or being clear about what they’re for, you show poor transparency and a lack of respect for your customers.
When you’re pricing your products, don’t leave surprises waiting for buyers after they decide to make a purchase. Include everything in your original quote and be honest.
Your buyers might ultimately pay the extra fees you add on (just like you paid for your extra carry-on bag) but they’ll likely lose some trust in your company, too — a loss more impactful in the long term than that small bump in profit.
Where to Go Next
Making the decision to prioritize pricing is the first critical step toward creating or improving your B2B pricing model.
Remember: the value you provide your customers (and the way they perceive it) is the core of an accurate, effective pricing strategy. Start with knowing and understanding your value, and build on that foundation.