Why Pricing Matters: 

• Ensures a business is profitable 

• Key determining factor for customers 

• Informs branding and image 

  Pricing is a key part of a company’s go-to-market strategy. It tells the market a lot about who they are and what they stand for. The effective use of pricing strategies can revolutionize a business – if done well. It all starts with deciding what positions you best to win in the market.  

  Pricing Market Positions: 

  • Cost-Plus Pricing: A company determines how much they put into a product, such as material and labor costs, and applies a set mark-up. This is a defensive position and a basic strategy for creating a profit. It ensures a profit but does not maximize revenue; meaning a company is leaving money on the table.  

  • Competitive Pricing: A company determines its prices based on what competitors charge. Aligning prices with the competition capitalizes on market opportunities and ensures you will attract business. However, for this offensive pricing position to work, a company must continuously research its competitors and adjust their own prices accordingly. 

  • Value-Based Pricing: A company sets its prices based on the customer’s perceived value of a product. In this strategy, the company takes the view that the customers are not worried about the business’s cost. Customers care about their cost and whether it is justified by the competition and the value of the product. 

  The Right Pricing is Crucial to Maximize a Business’s Success.  

  The two main benefits of taking the time to determine the best pricing strategy for you are: 1. Increase your profits and 2. Grow your business. Effective pricing is a significant growth opportunity for businesses. In fact, 85% of B2B companies see room for improvement in their pricing strategies.[1] 

  An effective pricing strategy 

  • Analyzes the competitive landscape 

  • Determines the perceived and actual value to customers 

  • Informs marketing campaigns 

  • Structures incentives and packaging strategies 

  Pricing research gives a company credibility in setting prices and then in negotiations with customers. Difficult-to-understand or unsupported pricing strategies may not only lower profits, they can also cause confusion for both sales representatives and consumers.  

  Show Me The Money! Why Doesn’t Everyone Do Competitive Pricing? 

  In the B2B market, pricing information may not be readily available. Therefore, setting competitive prices is challenging.  

  Understanding the pricing landscape requires: 

  • Secondary analysis of your competitors 

  • Strong networking 

  • Talking to customers – your own and your competitors’ 

  There are shortcomings to an exclusively competitive-based approach to pricing. Competitive pricing assumes a product is the same as the competition.  A company also assumes their competitors have done their own pricing research, but this is rarely the case. In fact, each month 70% of companies talk to less than 10 customers in a non-sales capacity.[2] Meaning, most companies are basing their pricing strategy on a handful of customers, if they are surveying the customers about pricing at all. 

  An analysis of the competitive landscape is an important part of a successful approach to pricing. It is not the entire story.  

  Value-Based Pricing is Hard! But Why? 

  It is not easy for a company to walk a mile in their customers’ shoes. Many companies assume that by gathering data from social media, they can understand their customers. What smart companies are beginning to realize is that consumer data mined from social media is missing a key feature: the consumer! To put the consumer back in to consumer research, companies need to talk to their customers and survey them on topics such as pricing. A word of caution to this tale: carefully word your surveys or you shall fail. A great survey design is necessary when asking customers about sensitive topics, like pricing, but with a great survey comes great data and even greater insights. 

  The value of speaking to customers about your pricing: 

  • Direct feedback from customers 

  • Research into potential customers and why former customers left 

  • Calculating the price/value gap 

  • Increasing value in a customer centric way  

  LinkedIn has successfully implemented a value-based pricing strategy in the complex SaaS market. LinkedIn is a social and professional network which brings value to clients by creating talent recruitment pipelines. How does LinkedIn value their product? By talking to customers, LinkedIn learnt the enormous value talent brings to businesses. In turn LinkedIn charges a premium, and their sales team has the research needed to justify prices to customers.  

  Conclusion 

  Maximizing profits, attracting customers, and building customers' loyalty all depend on a strong pricing strategy. In a constantly evolving market, doing research to keep prices right is an absolute necessity. Pricing is not a set-it and leave it exercise. Price is one of the most important decisions affecting a company and should not be left to chance. Appropriate pricing can be the driver of a business’s success. 

   

  References 

  1 Kermisch, R. & Burns, D. (2018, June 07). A survey of 1,700 companies reveals common B2B pricing mistakes. Harvard Business Review. Retrieved from: https://hbr.org/2018/06/a-survey-of-1700-companies-reveals-common-b2b-pricing-mistakes 

  2 Campbell, P. (2017, Oct. 31). Why value-based pricing is the best pricing strategy. ProfitWell. Retrieved from: https://www.youtube.com/watch?v=0oPIi_HVsy0