There has been a long-debated conversation about whether quoting different prices for the same product is fair. As a pricing scholar, I can offer my own take on this conversation and provide a deeper look at the various aspects of differentiated pricing and what constitutes fair pricing.
The reality is that different prices for the same product have always existed in B2B transactions because most deals are highly negotiated and buyers typically don’t know if they are getting the same price as someone else. Setting a variable price that matches the buyer’s sense of value for the product and transaction is inherently fairer for both buyers and sellers. Fairness is also the key to sustainable profits.
But what do we mean by fair pricing? There are a few different aspects that should be considered:
Fair Aspect No. 1: The buyer is charged an amount that aligns with his buying circumstances and use of the product. Need a rush order? Is the part key to your OEM offering? If so, buyers will gladly pay a bit more for it. Are there easy alternatives? Are you buying a large quantity? In this case, the seller will agree that a discount makes sense.
Fair Aspect No. 2: Each buyer is charged an amount similar to other buyers sharing the same buying circumstances. There is no favoritism and a buyer’s price isn't solely reliant upon his or her own negotiation skills. In this way, you’ll avoid the situation where a customer feels angry to learn that another similar customer got a 15% discount on the same product.
Fair Aspect No. 3: Everyone stays in business to buy and sell another day. If sellers can't meet the hurdle rates for profits, they withdraw from the market. If buyers are chronically overcharged, they die. Neither of these results helps anyone. By aligning prices around the unique value experienced in each transaction, neither the buyer nor the seller can take advantage of the other.
The reality is that the market price for any product, no matter how commoditized, is never just one price—it’s always a range of prices. In the B2B market, the price range is highly dependent on a number of different factors and it can be fairly wide. Within the range there can be dozens, or even hundreds, of valid price-points to choose from, and the profitability impacts between the high and low price can be dramatic.
The market may set the price boundaries, but beyond that, it’s a matter of making the most informed and most profitable decisions possible.
Price Segmentation and Optimization
Manufacturers actually have a tremendous amount of control over their pricing decisions. Even if they realize this, they are often hesitant to implement differentiated prices as means of improving profits because they are concerned how customers will view the approach.
Let’s take the example of purchasing office supplies. Would you expect that the owner of a small business with 50 employees would pay the same price per pen as a multi-billion dollar company with 20,000 employees? Of course not. You would expect large order sizes to get a price break.
Nonetheless, the concern persists and the end result is a lack of focus on the most powerful profit-lever available, and ultimately, money left on the table.
Price optimization, which is a means of setting differentiated prices, using data and predictive algorithms, actually increases fairness. When prices are aligned to marketplace circumstances for each unique selling circumstance, both sides of the table win.
I’ve seen dozens of B2B manufacturing clients use true price segmentation to understand what factors really drive price in their markets and then change the product price accordingly for each negotiation. Different buyers place different value on products, they expect differing levels of service and product availability, they order in different amounts, and they have different costs to serve—all of which justifies a different price point.
Buyers benefit by the inherent “fairness” in pricing that results from proper price segmentation and price optimization. The price sought by the seller represents the market-aligned price—the same treatment that will be given to other similar buyers—not an attempt to exploit any particular buyer who may be (momentarily) unaware of the market price of the product, or who may have recently been assigned to a new sales rep who doesn’t know the market prices just yet.
Another benefit is that each individual buyer gets inherited power from the collective negotiating skills of all previous buyers in his price segment that have successfully negotiated the seller’s target price to a given point, i.e., the market-aligned point. It’s kind of like crowdsourcing for pricing.
Barrett Thompson is the general manager of pricing excellence solutions at Zilliant. Over the past 25 years, he has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries within the manufacturing and distribution space.