The key to a good pricing strategy is to structure your pricing model for short-term profitability and revenue while simultaneously building long-term relationships. This is a tough balancing act but achievable if your mindset is based on courage, differentiation and relationships. These three attributes will serve you well even before you start filling in your pricing spreadsheets.
Pricing is a big issue in B2B companies. On a recent BrightTalk webinar, featuring Madhavan Ramanujam, Partner and Board Member of pricing strategy firm, Simon Kucher, Ramanujam reported that his company’s research showed that 80 percent of companies are facing pricing pressure and 60 percent are in a “price war”. Fortunately, you can apply three attributes to either stay out of pricing wars or win if you are forced into battle.
Courage is a fundamental pricing mindset attribute. Courage is required to hold the line when end-of-quarter or shareholder pressures are mounting. And it is even tougher when your competitors (perhaps with deeper pockets) are willing to buy the business by undercutting your pricing. Walking away from deals can be painful but the only thing more painful is to die a slow death by selling your products or services for less than they are worth. Remember the old saying: I lose money on every deal but I will make up for it with volume! You don’t want this to be your mantra.
Another mistake is to allow too much optional pricing behavior from your reps and sales managers. The mindset of “Do whatever it takes to make the deal happen” sounds good in theory but it can leave a lot of revenue and profit on the table. In some industries like enterprise software, the vast majority of deals are discounted and both buyers and sellers know that the discounts get bigger closer to the end of the quarter. In my early career at a major software company, a major customer held out on signing the contract until after 7 p.m. on December 31 and was rewarded with an almost 50 percent discount off list price – a deal they would not have achieved earlier in the quarter.
Sellers themselves are a big part of the discounting problem when they offer discounts early in the sales process. When potential buyers are granted a large (sometimes unsolicited) discount early on, they hear two messages. First, that you do not believe in the value of what you are selling (otherwise, why would you give it away!). Second, if a seller throws out a discount so early, there must be more concessions to be gained.
The point here is that the most carefully crafted pricing strategy is wasted if everyone knows that prices are just a starting point. After all, how many people pay the full sticker price at a car dealership – and does all the back-and-forth haggling make either buyer or seller feel good about the process? That’s not what you want for your business.
Differentiation is Critical
If you have been to business school and remember the product adoption curve, by the time a market gets to the late majority stage, discounting is common and unit profitability has shrunk. Some companies can sustain market share and decent cash flow in this environment, but many depend on innovations to get the next profitable revenue stream started.
Unfortunately, the Simon Kucher study mentioned earlier reported that 72 percent of innovations fail to monetize – and many of these so-called innovations fail because they do not deliver value to the marketplace that is compelling and differentiated. Differentiation is a powerful antidote to pricing problems. You can show your difference in product functionality, benefits, look and feel, packaging, or pricing. But if you play follow-the-leader, this often leads you right into failure.
As the late Jerry Garcia (of Grateful Dead fame), put it, “You don’t want to be considered the best at what you do. You want to be considered the only one that does what you do.” Please reread that sentence multiple times because it is the secret to the most successful companies. Also, note the use of the word “considered”. This does not mean that you actually have to be the only choice in a particular category, only that you are considered (perceived) to be so.
There is no magic formula to establish the value of differentiation because buyers are human and subject to all types of variables. For example, you may have friends who boast of spending $1200 or more for the latest iPhone, and others who will spend hours to find an unlocked smartphone on eBay for under $200. Both believe that they received fair value for the amount paid, even though the android smartphone has 90 percent of the functionality at just one-sixth of the cost.
If your marketing and sales teams believe (despite what they say) that your products or services are not truly different or unique from what your competitors are offering, they will betray this lack of confidence when trying to remain firm on pricing. They will offer pricing concessions as if your offerings are commodities, not unique and special.
Move Up the Relationship Hierarchy
Borrowing from an earlier CustomerThink post, the following chart shows various relationship attributes and how they apply when you are at different levels of the Relationship Value Hierarchy. As you can see, the further up the food chain you go, the greater the rewards. In fact, a trusted advisor or partner can often command 5-10 times the compensation of a vendor.
As a trusted advisor or partner, you become vital to your client’s business and much less susceptible to being jettisoned during tough budget periods and you will likely not lose your contract to a lower-priced vendor. Of course, you will need to work to maintain your preferred status but if you can do so, this can be a strong competitive firewall.
My Own Pricing Experiences
Despite my writing on the subject, I face pricing issues just like my B2B colleagues. I’ve been involved in pricing strategies for software companies as large as multi-billion in revenue and as small as brand-new start-up firms who have to compete with established players. As an interim CMO and revenue-growth consultant, I prefer to price on a retainer basis and conduct almost all my business this way. And although I am confident of what I do, and have a strong track record to justify my fees, I sometimes give in to that nagging voice that questions my value as well as my company’s. Because of this, I have no doubt left a fair amount of money in my clients’ bank accounts instead of my own.
One important lesson learned: If the majority of potential clients say yes without balking, you are probably charging too little. If the majority push back, you may be charging too much. It is usually better to err on the side of charging too much because you can always come down but it can be difficult to raise your prices in a competitive environment.
To achieve pricing success, keep your courage up, your differentiation apparent, and your relationships strong.
Great suggestions, Chris. I especially like the relationship value chart, which will help B2B companies think more strategically about their customer relationships.
Thanks Ruth. Companies that occupy a relationship with clients built on value and trust will definitely find pricing to be easier and more profitable.
Hi Chris, now I am not a pricing strategist but what I miss in the argumentation is the notion of value that the customer receives when buying a product/solution/service. How would this come into the equation? How about value transfer mechanisms that are less asynchronous as the typical sales transaction (you pay now and may get value later) or subscription fees that are at best an approximation to value based pricing?
Hi Thomas. You are correct about the importance of establishing the value of what a customer receives when making a purchase. It is what I refer to as proving the value of your differentiation, and if you fail to accomplish this, the prospect will consider your offering to be a commodity and pay for it accordingly. I also like your thoughts about value transfer pricing where it is not a “pay now and receive value later” transaction. There is a lot to say about this topic and I will explore it in a future CustomerThink column.