The business economy has taken a brutal beating lately. When a massive ship named the Ever Given ran aground in Egypt's Suez Canal, it had knock-on effects around the world. And as we try to head out of the pandemic, other serious supply chain issues have surfaced.
Faced with such volatility and unpredictability in the economy, company profits are getting squeezed. But what can B2B companies do about it?
When profitability suffers, the first order of business is to lower company costs. The lean process improvement model of ensuring all tasks and workflows are efficient and effective can have lasting positive effects on the bottom line.
Businesses can also consider outsourcing functions, such as IT, payroll, and even manufacturing. Your organization may never have fathomed that alternate raw material suppliers, contractors, and temp employees are capable of bringing instant skills to the workplace for less.
But cost reductions can take your business only so far. To maintain profitability, companies also need to take pricing action.
There are various approaches to raising prices, but increases must always be carefully implemented, and with an eye to the competition.
Four Ways to Strategically Raise Prices
Every pricing initiative should start with an understanding of company growth engines and the important sources of volume. Making changes that compromise those is bad business.
It's also necessary to have good tabs on market participants because competition and differential value set the boundaries for pricing. Improving the differential value of offerings actually makes it easier for customers to pay more.
At the core of business strategy is segmentation, based on a solid understanding of customers' performance needs, purchasing process, and criteria. Do they want to buy direct or through a distributor, and where are there price sensitivities?
Having that information makes it easy to determine less profitable SKUs and sell those through alternate channels such as e-business. Then you can be more aggressive with price in segments where there are no clear substitutes.
Also, value propositions must be fine-tuned for each target segment. Do the company offerings help customers reduce cost or increase revenue? Find your unique selling point and amplify it.
Beyond the broad strokes of business strategy, let's talk about the specific ways you can raise prices without sending your customers packing.
1. Get creative with pricing models
Think unique: Products, services, and parts can be classified by how unique they are to your customer.
- Mark up custom products and parts, while keeping items such as nuts, bolts, and hoses lower-priced to avoid substitution.
- Create "Good," "Better," and "Best" products for entry-level, target-level, and show-off products; it allows pricing flexibility.
- Provide lower-price offerings with higher margins, such as private-label items or insourced entry-level products, which have their place in the product range.
Think bundling: Items that are usually bought together can be bundled into an assembly or dispersion that makes subsequent processing faster.
- Parts used for routine maintenance, including consumables, lend themselves well to bundling. Imagine the convenience of a kit for gasket replacement that saves time and trips to the hardware store.
- Bundles can be priced slightly lower than the sum of the parts, or higher if there are efficiency gains.
- If an offering is late in its life cycle and sales are declining, customers can be migrated to SKUs with better margins.
- Exploit price elasticity when switching costs are high,or when there is a large degree of customization.
2. Tweak how your product is defined
Several tactics for redefining your product can work depending on the industry you're in.
- Add a valuable service component, such as installation or vendor-managed inventory to a physical product.
- Brand and productize delivery or maintenance contracts for better price differentiation.
- Make simple changes to product packaging—adding color coding on boxes or offering tote quantities of liquids—to afford opportunities for price adjustments.
- Modify price structure with a different unit of measure, e.g., charging by activity such as hours flown, gallons pumped, or number of students trained.
- Consider when renting versus outright purchase makes sense: Industrial customers often prefer renting over buying, whereas government customers may have easier access to capital budgets; subscription models are popular in software and can also be used for consumables or rental equipment—and adding automatic renewals makes the relationship even stickier.
- Use variations of fixed and variable price with the same product: Certain customers will prefer a monthly fixed fee with a variable usage charge over a higher fixed fee with a capped variable.
3. Be competitive about value
Many companies are shy about communicating quality and value, but it pays to be explicit about a product's price position in the market. Don't let prospects guess; if you have a unique or premium product, saying so will help justify a higher price.
Research customer operations in detail, and determine what end benefit your product contributes. Then value-price accordingly while being highly collaborative around innovation and product development. You can even stimulate new demand with a product and pricing comparison tool on your website.
- Change the price context by marking up freight and rush orders, or have a surcharge for small orders.
- Hook new clients with a basic service, then offer self-serve upsell for more functionality.
- Change cut-offs and target levels for volume discounts and rebates to improve margins.
- Enforce surcharge rules in contracts for fuel, shipping costs, or raw material price pass-throughs.
- Optimize price for high use/high utility SKUs.
Even if price increases feel risky, your company stands to claim a large share of wallet by carefully considering your industry, product, and how best to play pricing to your advantage.
How to Implement B2B Price Increases Wisely
Even if you think you've figured out the magic pricing strategy for your company, it's good business practice to charter a cross-functional pricing team that includes Sales, Marketing, Finance, and Operations before implementing any increases.
Take a calculated approach to adjustments, re-examining prices line by line, while keeping these things in mind:
- SKUs that haven't had increases recently may be priced too low; accordingly, there will be less resistance to increases.
- Always provide product and service options to retain price-sensitive customers. Cheaper, stripped-down "Good" versions work well for retaining customers, as do lower priced offerings made available in limited quantities.
When communicating price increases, provide an explanation for your decision. Don't shy away from mentioning how long it's been since prices were previously adjusted, or highlighting how much the customer has raised its own selling prices.
It's also a good idea to signal pending price increases directly to important customers. Announcing upcoming price moves through trade press is not collusion, and it gives competitors a chance to follow suit, increasing industry profitability across the board.
Tying It All Together
It's difficult to make a conventional price increase stick without doing the proper market research and giving pricing strategy careful consideration. Effective pricing starts with segmentation of the market, based on customer needs. If pain points are well understood, an offering that meets segment needs can be designed and priced according to the value it provides.
Adding service components or innovative pricing models such as subscriptions or activity-based pricing can add differentiation. No matter how a company arrives at a price, it's important to communicate the value of each product and service.
More Resources on B2B Pricing Strategy
Continue reading "Company Profits Squeezed? Here's How B2Bs Can Justify Raising Prices" ... Read the full article
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