Many large B2B companies have been early adopters of price optimization software, but the technology is spreading further. B2B companies realize that relying on analysts with spreadsheets and manual tools to set and manage price points is impossible. These manual approaches have resulted in irrational prices and caused customer dissatisfaction.
Companies can correct course by embracing rational pricing to ensure prices make sense to all stakeholders.
For prices to make sense, they must align with local market dynamics and customer relationships, as well as the perceived value of products and services. From a corporate P&L perspective, prices should line up with strategic and financial goals to meet the objectives of the executive team and shareholders. B2B companies need to set prices that deliver the growth and gross margins committed in the business plan.
When price guidance is generated for sales teams, it must meet rational expectations. Your best customers should get better pricing than casual customers, and when customers increase their purchase volume, they should get better pricing. Too often, prices fail to meet these rational expectations. As a result, B2B companies are often left wondering how to provide price guidance that makes sense and that sales reps feel confident using in negotiations.
For years, companies have failed to provide useful price guidance to sales reps. As a result, price guidance given to sales and realized prices transacted with customers regularly defy business logic. For example, high-performance and premium-brand products often sell for the same or less than mid-tier alternatives, undermining merchandizing strategies. Large, loyal customers may pay more than casual customers.
To address this, B2B companies often expend significant effort administering pricing rules designed to ensure margins and price relationships line up. But declared rules and backward-looking analytics are a lost cause. Innumerable customer-product-market combinations and the speed of change make manual rules-based pricing infeasible. Without reliable rational guidance, the sales team’s only options are ad-hoc overrides and subjective negotiations.
These improvised price decisions leave money on the table and are at odds with broader business logic and the corporate strategies that should be reflected in achieved prices. Another consequence of poor guidance and irrational prices is distrust between buyers and sellers. When prices are opaque, lack solid justification, and negotiated without context, sales reps lack conviction about the “right price,” and customers feel obliged to push back. It’s no wonder pricing practices are usually a top source of customer dissatisfaction.
There is a way to achieve more rational prices that make sense to all stakeholders. On the product value dimension, rational prices are aligned as expected, given good/better/best relationships, with spreads that reflect relative value. The prices follow universal business logic along all key customer relationship dimensions so customers can be fairly rewarded with better discounts when they improve their buying behaviors.
In contrast to rules-based approaches, rational prices require an optimization-based approach to price setting that will align prices across numerous dimensions simultaneously, a process too complex to perform using spreadsheets. Rational pricing is a natural first step in adopting price optimization because it is easy for all parties to embrace.
When B2B companies give sales reps reliable price guidance, the resulting decisions improve top and bottom line performance. Revenue growth comes from greater market and wallet share, while margin and profits improve by stopping over-discounting and reshaping customer buying behaviors. Pricing becomes a source of competitive advantage and strategic growth, but through greater transparency and rationale, it helps a company’s sales team strengthen customer relationships.
Ultimately, with this approach customers know they are getting the right price on every deal, and what they can do to earn better terms. With more satisfied customers, higher morale in the sales force and better P&L outcomes, B2B companies will be in a better position to beat shareholder expectations.