In the early 2000s, if a company did not have an ERP system in place they were considered far behind. Today, investments in technologies like ERP and CRM systems are considered table stakes and a normal cost of doing business for most large B2B companies. The same can be said for lean and six sigma programs. Yet, there is one area of business — the most powerful source of profits — that B2B companies often neglect: pricing.
Far too many manufacturers and distributors still use outdated pricing practices and sheer guesswork to guide their day-to-day pricing decisions. As a result, there’s a lot of room for improvement in this area, and most companies have barely scratched the surface of what’s really possible when it comes to profitable pricing in their marketplace.
Every B2B company desires to maximize margins, improve profit performance and increase shareholder value, but few are focusing their attention on pricing, even though it’s the most powerful means to achieve all of these objectives. What’s behind this contradiction?
Companies fail to leverage the power of pricing to improve their performance because they believe a series of closely-held myths about pricing in B2B environments. In fact, there are three primary margin-killing pricing myths that are routinely encountered in B2B companies.
Myth #1: “The Market Controls the Price”
When executives and managers buy into the myth that “the market controls the price,” they are essentially abdicating their responsibility to make sound choices for their company and shareholders, choosing instead to let the customers tell them what price to charge. As a result, their margins are virtually guaranteed to suffer.
The reality is that the “market price” for any product, no matter how commoditized it may seem, is never just one price — it’s always a range. In the B2B industry, the range is highly dependent on a number of different factors and 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 the low prices across this range can be dramatic. So while B2B companies may not be able to control the ballpark, they can definitely decide where to play within that ballpark.
In reality, manufacturers and distributors have a tremendous amount of control over their pricing. The market may set the boundaries, but beyond that, it’s a matter of making the most informed and most profitable decisions possible. The first step, however, is getting past the mistaken belief that the market has all the power and there’s nothing you can do.
Myth #2: “We Have More Important Things to Worry About than Pricing.”
B2B executives and managers typically have a variety of “big” initiatives to consider. Do they spend $200 million on a new facility? Do they invest $100 million in R&D on a new product line? Should they try to acquire a competitor? With decisions like these looming large, it’s all too easy for some companies to see pricing as a relatively minor issue in the grand scheme of things.
However, compared to pricing, there are very few activities that can generate as much financial impact in as little time. While a new facility may ultimately improve profits by two to three percent five years from now, improved pricing can increase profits 10 percent or more this year.
After the dust finally settles, the newly acquired company may improve earnings by five to seven percent, but with acquisition not always working out as planned, it could also result in an earnings hit. Improved pricing can have a positive impact in a matter of months with much less investment, risk and organizational upheaval.
Myth #3: “Commodity Products Can’t Be Price-Differentiated.”
Many B2B companies eliminate the opportunity to differentiate prices by categorizing certain products as “commodities.” The commodity characterization is routinely used to excuse extreme discounts in the field.
In reality, there are few, if any, true commodities in this world. Supposed commodities do have the opportunity for price variation and differentiation because there are always a variety of factors that determine what a customer is really willing to pay. Some of these factors are product-related, but many factors have to do with the customer’s situation, your relationship with the customer, and the circumstances surrounding the specific deal at hand. For example, does the customer need the product right away or two weeks from now? Does the customer need to speak with a specific sales person to place the order or is ordering via e-commerce or by calling into a pool of sales reps acceptable to the customer?
Differing expected levels of service and urgency are just two examples of why so-called commodity products actually can be price-differentiated. By understanding how these factors affect willingness-to-pay, B2B companies can break free of the commodity myth for good.
Ultimately, enhancing the quality and accuracy of B2B companies’ prices is the fastest way to improve profitability and gain a competitive advantage. However, to achieve a more profitable reality, manufacturers and distributors need to aggressively counter the top margin-killing myths that are holding them back.
Barrett Thompson is the general manager of pricing excellence solutions at Zilliant. Over the past 25 years, Barrett has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries within the manufacturing and distribution space.