Setting the right price can be difficult in any situation, let alone in B2B where complexities run amok. Discover how to optimally set prices using product, market, and price structures in this article by Kalle Aerikkala.
One of the most difficult aspects of pricing in B2B is navigating all the complexity in business models, divisions, markets, channels, regions, and products to set the right prices for the right products, at the right time. I recently wrote about how you can navigate these complex B2B structures. If you haven’t had a chance to read that article, start there. Otherwise, let’s talk about setting the right prices.
In many B2B businesses, one of the key issues in setting the right price is to ensure the price is comparable and logical across similar products. This is the case regardless of the exact pricing setup and method. The challenge is identical if cost-plus pricing is used to set a price for a customer’s unique item or if a value-based approach is used to set a list-price. The most important support for the pricing is a high-quality product structure.
Set Prices Using Product Structure
Pricing through the product structure can take different forms depending on the type of pricing need. When pricing customer unique items based on costs, the key usage of the product structure is to group products with similar characteristics in cost, build-up, and margin assignment. Whereas, when pricing products through a value or attribute-based approach, the focus in product structure is to collect products that share the same characteristics that customers view as value proxies.
Cost-based and value-driven pricing approaches can be complemented with market or competitive pricing approaches. Competitor prices act as an anchor for the products grouped together. The competitor data can be extrapolated within the group when the product structure is of high quality. This method will make the necessary sample size for competitor prices smaller, creating more opportunities to use the additional information.
Identify and Use the Right Data for Pricing
When the product structure is in place, the next big question to answer is, what data do I need to set prices? Putting in the effort to create a high-quality product structure will simplify this problem. When you have a clear idea of the product structure, the next step is to define the first and most important data elements for pricing. There do not need to be more than a few elements in the beginning.
Starting simple will speed up the adoption process and ignite your continuous improvement. The crucial categories include competitor prices, costs, and value proxies. To start, consider focusing on one category and strive to use data from at least two of the three.
Set Prices Using Market and Price Structure
Organizations that price through reference prices commonly need to set up price structure that will better suit multiple markets. This is not relevant for B2B organizations that are directly pricing on the customer level. The first consideration should go to the price structure itself. What are the different prices you want to manage? A price structure decision tree can help you make these important decisions.
When designing the price structure for a new business or working on a significant transformation in pricing for any existing business, the price structure deserves special attention. The price structure will determine multiple things later in pricing processes and responsibilities.
Price Level Definitions
When designing the price structure, an equally important definition will be its associated price level. Many B2B organizations do not give enough attention to these definitions, which can cause issues later in price setting and customer price guidance. The first price level definition to consider is the reference price, whether its set globally or locally. There are many ways to approach the reference price level, including:
- Reference price reflects the highest price any end customer would pay – almost everyone will get a discount
- Reference price is an average price – price alignment will go up and down
- Reference price matches a certain customer group or channel
Each of these approaches has their own cautions and considerations. For example, if your reference price reflects the highest price any end customer would pay, don’t set the reference prices unrealistically high. When it comes to average price, be cautious about publishing reference prices where some customers would face higher prices if they can not be justified through optional services. Finally, if you’re matching reference prices to a certain customer group or channel, attention must be paid to price alignment later so as not to create illogical positioning.