November 06, 2022
Determining the cost of your B2B products or services can be difficult. Price things too high and people won’t buy, price too low and you’ll miss out on potential revenue and may fall short of your goals. With B2B pricing, there are many factors to weigh when deciding on your pricing model and strategy, from your product and customer sales data to how competitively you’ve positioned yourself in the market.
In this article, we’ll review which factors of your business truly matter when optimizing your pricing strategy so you can stay focused on what brings results. We’ll look at various B2B pricing strategies and identify what data you want to pay attention to.
B2B Pricing Strategies
Finding the correct pricing process for your B2B business ultimately depends on your goals as a business. Here are a few different pricing strategies that B2B companies use to determine how to price their products.
A value-based pricing strategy uses a customer’s perceived value of your product to set the market price. Instead of focusing on how much it costs you to produce, you turn your eyes to what it’s worth to your market. This is a great way to get the most out of your product because you can charge a higher price without necessarily investing more in production. However, it does require some extra work in brand building and marketing to help shore up perceived value.
Not only does your brand influence your customer’s perceptions, but competitors’ branding and pricing will also influence the perceived value of your products. Forming a relationship with your customers is vital to understanding how they value your offerings. Your marketing and sales teams should work hand in hand to build relationships with your clients and use their feedback to determine the best pricing approach.
The cost-plus pricing strategy is a much more mathematical pricing strategy. Some B2B companies like it because it provides a guaranteed way to price for consistent profit margins.
With cost-plus pricing, you’re essentially adding a markup to your cost of production. You can choose a percentage rate to add to products’ internal costs to determine your price. For example, let’s say your product costs $20 in materials, $5 in labor, and $5 in miscellaneous fees. In total, your product costs you $30 to produce. Perhaps your markup rate is 50%. Then you multiply $30 by 50% for the final price: $45.
The primary driver for this pricing strategy is your overall profit margin goal, which in turn will dictate the markup rate for a set of products.
A competitor-based pricing strategy is relatively self-explanatory. You can use competitors’ price points and pricing data to inform how you price your products. A benefit to competitor-based pricing is that you don’t risk alienating any clients because any price increases will reflect trends across the industry.
Competitor-based pricing is advantageous if you’re a new business in your industry and need a quick way to determine the lay of the market and price points established by your competitors. As you grow your business and collect your own data, you can make price changes that fit your organization’s goals, your current customer base’s needs, and/or a new, more targeted audience.
There are a handful of pricing tools out there that rely on artificial intelligence or machine learning to help you make informed decisions about your pricing model. We like Pricing Guidance the most because it helps with setting prices by analyzing data and customer segments.
Price Guidance is a price optimization tool that uses historical pricing transactions along with customer preferences and competitor pricing to identify an ideal pricing range. This range includes the lowest price (floor) and the highest price (ceiling) at which you should consider selling the product. We call this product price range the Price Band.
When a salesperson prices within a given Price Band, they can be assured that the price they’re quoting is fair and that it aligns with the individual customer needs and preferences. In addition, organizations can use Price Guidance to determine areas of poor pricing performance which are in need of corrective action.
Often, businesses will create dynamic pricing using a combination of these frameworks. As you develop your process, you’ll start to see which strategy best fits your business and be able to adapt to rely on it more than the others.
Although all of these strategies approach pricing from a different perspective, there are some core factors that your business should consider as it decides on a pricing strategy or pricing model.
Price It Right
Whether you’re a startup or an enterprise-level company, choosing the right pricing strategy for your B2B company is integral to your success. After you have the appropriate strategy in mind, you might need help implementing and adjusting it to fit just right. A one-size-fits-all solution will rarely deliver the results you need.
Rather, each organization needs to develop its own pricing solution that takes into account the specific goals and complexity of the business. As your business continues to grow and your data continues to evolve, your pricing will need to be evaluated as well. Most companies revisit their pricing at least once per year, if not more.
To do this, you’ll need historical sales data, information about the customer, product preferences and trends, competitor pricing, and key pricing algorithms to generate the right price for the right customer at the right time.
At EnterBridge, we have helped companies over the past 20 years implement the pricing strategies highlighted in this article. Book a call to learn more about this service and how we can help your business.