Feeling Sensitive

Most B2B companies do not use price sensitivity to set prices because they assume they can’t. They think it’s out of their reach because the textbook approaches — such as price testing or win/loss conversion analysis — just don’t work very well in B2B.

Price testing is operationally challenging and the risk of losing customers during testing is too great. Conversion analysis requires excellent win/loss data, which is often unavailable or unreliable in B2B companies.

As a result, companies often assume they have no choice but to set prices without a clear understanding of price sensitivity, leading to a risky guessing game about the right price. Yet price sensitivity is the most important factor in setting profitable prices while keeping revenue risk to a minimum. When you don’t understand price sensitivity for a customer segment, your risk of leaving money on the table or losing profitable sales significantly increases.

For more than 20 years, we have accepted revenue management as a best practice in the airline and hotel industries — setting prices based on elasticity and demand to improve financial performance. Yet in the B2B environment, many companies believe that setting prices is more of an art than a science, or that price elasticity cannot possibly be calculated given the complex selling circumstances.

Eliminate Guesswork

The good news is that as B2B manufacturers you no longer have to guess what the appropriate price is to maximize revenue or margin. It is possible to know precisely how the market responds at any given price point, for every given supply chain or logistics cost-scenario and by customer segment in B2B transactions.

The data needed to take a scientific approach to price optimization already exists. Its readily available transaction data — the production cost, customer behavior and order data that every company captures in the course of doing business. From that data, the production management team can segment customers into small groups that have similar price responses and calculate the price elasticity down to the transaction level on an ongoing basis for each segment or by customer.

Understanding buyers’ true price sensitivities at a line-item level is not easy. If it were easy, every B2B company would do it already. But the challenge has nothing to do with the actual mechanics involved. Technology exists to handle all of the heavy lifting, instantly and automatically generating optimized prices. The hardest part is actually recognizing the opportunity in the first place and taking action.

Examples of Effectiveness

Take a successful electrical manufacturing company. They might have a robust project-based business, with strong customers – 100 percent negotiated and rock solid. If they embarked on price optimization, the company, which perhaps has more than 600 field sales reps and several hundred distributors with volumes approaching 40,000 quotes per month, could see margin dollars increase into the millions. The result of price optimization in this market can offer business process streamlining, via pricing standardization, which could improve turnaround time on quotes by an order of magnitude, from perhaps two days to only four hours.

A typical regionalized building products distributor with national reach could use price optimization to sharpen its price lists. This type of distributor typically uses tailored price lists to attempt to manage pricing for different regions of the country with differences economics, customer types and needs. Businesses like this have a huge number of price points contained in a price matrices so large and cumbersome, with existing processes, they are challenged to keep them updated.

In this kind of business, supplier costs can change quarterly, but pricing chases cost and the lag behind can eat through profits. By seeing this need, the business could implement price optimization technology that allows prices to be updated by a single pricing department empowered with every price with each cost change across the enterprise, and results could see bottom line improvements in the millions.

Taking a surgical approach to setting prices by calculating price sensitivity, a big part of which is involved in the raw data coming from the supply chain and particularly in highly transactional businesses, can have a huge impact on profitability while minimizing risk and improving responsiveness to market dynamics. The technology now exists, is proven and is readily available. Isn’t it time your business team looked into pricing?

Kevin Mitchell is the President of the Professional Pricing Society, a worldwide learning organization dedicated to pricing training, education, professional accreditation and sustaining a vibrant culture of academic and real-world pricing expertise. For more information, visit www.pricingsociety.com.

 

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