“Digital pricing” is no longer exclusively a buzzword for the consumer goods and tourism sectors. The term has now entered the conversation in the traditional B2B industry, but many are wondering what aspects of pricing are actually “digital” and how this trend can help their companies achieve better prices.
Pricing in today’s B2B industry can be roughly divided into three tiers. At the bottom is unstructured, cost-plus pricing. Approaches in this tier base prices on a single markup factor, as is the case for spare parts, where cost-based pricing doesn’t take into account individual part types, USPs, or product lifecycles. Some companies set prices and grant conditions primarily using gut feeling without any connection to the actual value of the customer. If your company still sets its prices this way, you are definitely an industry straggler.
Approaches in the next tier are more systematic and better differentiated. Several B2B companies have already taken their first steps in this direction, but few have actually followed through with a consistent approach. The aim in tier two is to integrate the company’s sales and pricing expertise into a pricing model and, if necessary, identify new patterns through data analysis and simulations using statistical methods. For example, companies can make use of other data sources, such as the CRM, to identify additional criteria for customer segmentation that go beyond the scope of traditional revenue-based ABC analysis; these criteria can then be assessed to determine their impact on customers' willingness to pay. Segmentation can incorporate factors, such as the physical distance between the customer and the competitor or the importance of the company’s product to the customer based on the customer’s manufacturing expenditure.
New algorithms are enabling B2B industry companies to follow differentiated pricing approaches with increasingly accurate predictions and decision-making. However, insufficient variety of data and transactions limits how precise their results can be.
Third-tier approaches are based around dynamic or automated pricing. This is completely uncharted territory for most companies in the traditional B2B industry but offers many new opportunities. Prices can be continuously adapted to external conditions, changes in the market environment, or (publicly available) competitor prices. In addition, internally available factors can be incorporated automatically. For example, prices can be adjusted dynamically based on the company's capacity utilization or in reaction to the number of internal price escalations. When the market is booming and sales teams are finding it easier to implement prices, the price escalations rate declines. The system recognizes this and responds by automatically setting a high (target) price for specific cases.
To unlock the opportunities of digital pricing for your company, the following steps are essential:
1. Implement a topline pricing strategy
Define your pricing strategy based on the attractiveness of the market (size, price level, etc.) and your competitive strength (product portfolio, service level, etc.), differentiating by region, industry, and product. These factors form the framework and parameters for any pricing decision, no matter whether it's digital or analog. When defining your corporate strategy, you may decide not to implement dynamic pricing and instead present stable prices as a USP.
2. Make sure data is well integrated to avoid “data cemeteries” and silos
A recent Simon-Kucher study showed that while nearly all industry companies collect data on their customers, only half do anything with it! This is often due to fragmented systems or data being poorly integrated. Effective use of data is a basic requirement for digital pricing.
3. Use algorithms in conjunction with expert knowledge
Combine your sales teams’ knowledge about customers and products with algorithms based on big data to identify suitable value-based pricing systems. When optimizing pricing models, it’s important to maintain a strategic focus at all times – this is one of the biggest weaknesses of price models based on math alone. In addition, B2B sales teams should always be able to explain prices to customers.
4. Anchor solutions in the organization (change management)
One of the most important success factors of a pricing project is how well it’s anchored within the organization. Your company will only succeed by bringing on board all relevant stakeholders and defining clear responsibilities, KPIs, and processes (including system integration). A “black-box” approach will fail before sales even has a chance to get used to it.
Digital opportunities, such as big data, machine learning, and artificial intelligence, can absolutely generate added value for pricing methods, but they are not a magic bullet! In addition to facts, market trends, and risks, (digital) pricing must always consider corporate strategy and should never blindly rely on mathematical formulas.
This article has first been published on industriemagazin.at in October 2018.