Moving the Decimal: The Evolution of Pricing in B2B

Pricing: The Evolving Discipline

Pricing used to be an overlooked aspect of business strategy, with many companies taking a haphazard approach to setting prices.

However, this all changed in 1992, when an article in the Harvard Business Review highlighted the impact that optimized pricing could have on a company’s profitability. This article introduced the concept of the “price waterfall framework,” which helped companies to identify profit leakages in their pricing strategies. Since then, many companies have implemented formal pricing processes and centralized control to optimize pricing and increase profits. However, in doing so, they must also consider the customer experience to strike a delicate balance between profitability and customer satisfaction.

In this blog post, we’ll discuss the history and evolution of pricing, and B2B selling behavior, including recent changes in buyer expectations and how they impact a company’s pricing capabilities. We’ll also explore how pricing has become a crucial element of the customer experience. If companies can strike a balance between profitability and customer satisfaction, they can ensure happy customers and healthy profits for years to come!

The Big Ideas

Pricing used to be a bit of a mess. Before the 1990s, most companies didn’t see pricing as something they needed to invest in or be particularly good at. It was more like, “Everybody does pricing, nobody does pricing.” But then, in 1992, two smart people wrote an article in the Harvard Business Review called “Managing Price, Gaining Profit,” and it started to change things.

The article had two big ideas. The first was that small changes in price can have a huge impact on profits. They found that a 1% increase in price could lead to an 11.1% improvement in profitability on average. So, why weren’t more companies investing in making sure their prices were optimized if it could have such a big impact on profits?

The second big idea was the “price waterfall framework.” This was about how many companies didn’t really know how pricing impacted their margins and profits. They measured bottom-line profitability but didn’t have a clear view of all the profit leakages that happen along the price waterfall. It was kind of a mess.

Changing Direction

It took a while for companies to figure out what was going on with their pricing, but when they did, they often found complete randomness to their pricing. Executives expected prices to follow a pattern, where larger customers would get lower prices due to their better negotiating power. But when they looked at the variation in prices across customers for the same product or service, they were surprised by the breadth and depth of pocket price variation.

Companies started to realize they were leaving significant profits on the table with their current pricing practices. So, they started to apply tried and true management techniques used in other functional areas to pricing. They added formal pricing functions, centralized control, and instituted formal pricing processes like approval processes for decision-making.

All this was good for the bottom line, and for the pricing profession, but there was a problem. The context for how to do pricing well was changing. Pricing increasingly became a customer experience issue in addition to a management discipline issue.

Part of the Customer Experience

So, while it’s great that companies are taking pricing seriously now, they need to remember that pricing isn’t just about maximizing profits. It’s also about providing a good customer experience. It’s a delicate balance, but if companies can get it right, they’ll be able to reap the rewards of both happy customers and healthy profits.

Speed and trust are crucial factors, with buyers expecting quick responses to their requests for quotes and preferring pricing from suppliers that use algorithms. To stay competitive, companies must invest in pricing capabilities that align with these changing demands to capture an increasing share of the market and drive revenue growth.

As technology evolved, so has the consumer experience, and their expectations of companies and the overall buying experience have evolved as well.

Changing B2B Buyer Needs

Have you ever been frustrated by a website that’s hard to navigate, doesn’t give you the information you need, or makes it difficult to find the right price? You’re not alone. As it turns out, B2B buyers have been experiencing these same issues, and they’re demanding a better experience when it comes to purchasing products and services.

Evolution of the Buyer Experience

In the past, B2B sales were dominated by high-touch interactions between buyers and salespeople, and pricing was often revealed only after significant back-and-forth negotiations. But times have changed. Buyers are increasingly shortlisting vendors without interacting directly with salespeople, and they’re expecting prices to be transparent and readily available during the self-discovery phase of their research.

In fact, a recent survey found that the sales experience is becoming more important than traditional differentiators like brand, product features, and value to price. This means that companies need to focus on providing a frictionless buying experience that’s fast, self-service, and market-relevant.

The New Buyer Experience

Speed is one key element of this new sales experience. Buyers expect quick responses to their requests for quotes, and research has shown that companies that respond within 4 hours have a much higher win rate than those that take longer. This means that pricing processes need to be streamlined and efficient so that companies can deliver market-relevant prices quickly and effectively.

Another important factor is trust. Many buyers prefer pricing from suppliers that use algorithms, which are perceived as fair and trustworthy. In fact, a survey found that 60% of B2B buyers prefer pricing from suppliers driven by algorithms rather than prolonged traditional price negotiation.

Staying Competitive

So, what does this mean for companies? To stay competitive in today’s B2B landscape, it’s crucial to invest in pricing capabilities that align with the changing demands of buyers. This includes providing market-relevant prices that are transparent and readily available, as well as ensuring that pricing processes are fast, self-service, and efficient. By doing so, companies can capture an increasing share of the market and drive revenue growth.

To keep up, businesses can shift to low or no-touch digital channels, use data and algorithms to adjust prices quickly, provide a consistent pricing experience across all channels, and build a more nimble pricing organization. By making these changes, companies can meet customer demands and remain competitive in the market.

How does B2B pricing need to change to meet the needs of the new B2B buyer?

Have you noticed how more and more people prefer to do business online these days? It’s become pretty clear that pricing is a huge factor in the digital world, and companies need to step up their game to meet customer demands. Unfortunately, many companies are struggling to adapt to this new environment, but there are a few things they can do to improve their pricing game and keep up with the times.

Efficient and Transparent Pricing

First, today’s buyers want an efficient and fair transaction, not a drawn-out sales cycle. So, companies need to shift their pricing to low- or no-touch digital channels that let customers self-serve and access market-relevant prices easily. In fact, research shows that many buyers are willing to pay more for the convenience of instant buying and avoiding lengthy price negotiation processes.

Secondly, companies need to use data and algorithms to deliver market-relevant prices that can be adjusted quickly based on current conditions. With today’s supply and cost volatility, customers expect prices to move dynamically, and companies need to be nimble enough to keep up. Many buyers also prefer personalized, market-based prices, so having the technology to deliver this kind of pricing is key.

Streamlining the Experience

When high-touch pricing negotiation is necessary, companies can use the same data and algorithms to create a “no-touch” pricing range supported by facts around what similar customers are paying. The goal here is to make the process as easy and frictionless as possible.

It’s also crucial to provide a consistent pricing experience across all channels. Whether a customer is talking to a salesperson or checking a page on the website, they expect to see the same pricing. This often requires an upgrade from using Excel to manage pricing across channels.

In With the New

Finally, with all the advancements in pricing technologies, companies can now build a more nimble pricing organization that takes a strategic role in crafting and testing different pricing strategies. This shift allows pricing groups to open new growth and profit opportunities for the company.

These are only a few things that companies can do to improve their pricing game in the digital world. By making these changes, companies can keep up with customer demands and remain competitive in today’s market.