It’s fair to say that every B2B company would like to maximize margins, improve profit performance, and ultimately, increase shareholder value. However, relatively few B2B companies are focusing their attention on the single, most powerful means to achieve these objectives: price.
It’s evident that many manufacturers and distributors struggling with low margins often follow a series of closely-held myths about pricing in a B2B environment. This article will look at the top margin-killing pricing myths that B2B companies encounter.
Myth 1: “The Market Controls the Price.”
The market price for any product is never just one price—it’s always a range. 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. So contrary to the myth, manufacturers and distributors have a tremendous amount of control over their pricing decisions.
Myth 2: “We Have More Important Things to Worry about than Pricing.”
B2B executives and managers often consider major initiatives in an effort to improve their profits, such as purchasing a new facility, investing in a new product line or acquiring a new competitor. However, these initiatives can take several years for companies to begin seeing profit improvements.
With such large decisions top of mind, manufacturers and distributors frequently disregard price as a key factor to improve their margins. Ultimately, optimized pricing can improve earnings by 5% to 7% in a matter of months rather than years—with much less investment, organizational upheaval and risk.
Myth 3: “Commodity Products Can’t Be Price-Differentiated.”
Oftentimes, B2B companies eliminate even the slightest expectation of rational or thoughtful pricing by formally categorizing certain products as commodities. The commodity characterization is routinely used to excuse extreme discounts in the field. However, there are few true commodities.
In fact, there are a variety of factors that can determine what a customer is really willing to pay. Some of these factors may be product-related, but many factors have to do with the customer’s situation, a sales rep’s unique relationship and services, and the circumstances surrounding the specific deal at hand. By understanding how these factors affect willingness-to-pay, B2B companies can break free of the commodity myth for good.
Myth 4: “Pricing Improvement Puts Revenue at Risk.”
Many manufacturers and distributors believe that pricing improvements will automatically jeopardize their revenue. However, in the B2B market, the objective of pricing improvement should be to precisely identify those specific situations where you can charge a little more, with minimal risk.
In other words, companies can still continue to win business, but they do so without discounting any further than necessary. Instead of thinking of pricing improvement as a price increase, B2B companies should think of it as an end to over-discounting.
Myth 5: “Experienced Salespeople Know How to Price.”
Established B2B companies often assume that more experienced salespeople are less likely to have any pricing problems and are more likely to choose the most profitable prices. However, experienced salespeople often exhibit learned behaviors that are not conducive to profitable pricing, such as guessing instead of researching, short-changing the value proposition, assuming competitive responses and over-estimating price sensitivities. While it may seem counter-intuitive, B2B companies with the most experienced sales teams often leave the most money on the table.
Myth 6: “Compensating on Margin Ensures Good Pricing.”
Many B2B companies understand why revenue- or volume-based compensation encourages bad pricing behavior among salespeople. Unfortunately, many manufacturers and distributors now believe that margin-based compensation is a solution to their pricing problems.
It’s a common belief that quality pricing behavior is guaranteed when salespeople have a financial incentive to maximize margins. However, salespeople frequently overestimate the personal risks associated with trying to get more margin dollars out of a deal. They often believe that the positive compensation benefit of getting additional margin is overshadowed by the negative compensation impact of losing the deal altogether. This “something is better than nothing” dynamic causes salespeople to play it much safer than they really need to, leaving money on the table in the process.
Myth 7: “Pricing Has to Be Simple To Execute.”
Part of this myth is true—the notion that salespeople in the field can’t execute pricing models that are too complex. B2B companies that embrace this myth usually end up using very basic and rudimentary pricing models that allow millions of margin dollars to slip through the cracks.
However, the more granular and specific the pricing model, the more profit that model is capable of extracting. Using today’s pricing technology, salespeople are shielded from highly sophisticated pricing models, making them simple to execute in order to capture more profits.
Myth 8: “Sales Will Never Give-Up Control of Pricing.”
There’s a common misconception that in order to achieve improved pricing performance, B2B companies must centralize their pricing decisions instead of allowing salespeople to take control. In reality, today’s pricing technology allows B2B companies to improve pricing performance without stripping salespeople of authority and control. Pricing decisions can still be entrusted to the field if salespeople are equipped with predictive price guidance that is specific to each selling circumstance.
Creating a More Profitable Reality
Pricing is the most powerful profit lever available to manufacturers and distributors. There’s simply no faster way to improve profitability and gain a competitive advantage than enhancing the quality and accuracy of a company’s prices. To achieve a more profitable reality, B2B companies need to aggressively counter the margin-killing myths and closely held beliefs that are holding them back.
Barrett Thompson is the general manager of pricing excellence solutions at Zilliant. Over the past quarter century, Barrett has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries within the manufacturing and distribution space.