Despite higher inflation and escalating input costs eating away at profitability, one B2B payments platform continued to shy away from price increases. In the following case study, we share how this company overcame organizational challenges and introduced an ambitious pricing initiative, while sustaining strong customer relationships.
US inflation is at record highs. Particularly concerning is the dramatic rise of input costs like labor and raw materials. For example, the US employment cost index increased at its fastest annual pace in two decades in 2022. The Henry Hub Natural Gas Spot price has also nearly doubled since the start of 2022.
As input costs continue their steep, upward trajectory, some payment platforms have taken decisive action to protect margins. Simon-Kucher data suggests leading B2B software providers are targeting pricing levels between 7 percent to 20 percent higher to counter rising costs.
However, the ability to increase prices with this degree of ambition and confidence can be challenging for some organizations. At one large US payment processor, customer success teams expressed concern that a price increase would negatively impact deal flow, could cause existing customers to begin considering alternatives providers, and even trigger customer backlash.
They are not alone. According to our global Simon-Kucher study on inflation pricing, as many as one-third of companies have neither implemented nor planned any price increases despite rising costs.
How to approach a price increase in challenging times
To support a successful pricing initiative, a systematic approach centered around data analysis, customer insights, sales enablement, and reporting is needed. Using this approach, our US payment processor was able to re-price existing accounts, revamp list pricing for new customers, and offer customers greater cost flexibility. The processor was able to realize a 12 percent net revenue uplift while sustaining strong customer relationships throughout the pricing initiative.
Here is how we helped them succeed:
Identify top value drivers influencing customer buying decisions
Based on our project experience, as many as 70 percent of a B2B platform’s revenue base can be price insensitive in that these customers would respond to a price increase by simply paying it. Usually, less than 20 percent of the platform’s revenue base will exhibit extreme price sensitivity. This is because the most important factors influencing a buying decision are usually value drivers like ease-of-use, convenience, or a unique product feature.
Contrary to popular belief, pricing is not the most important influencer (it ranks in the middle) and rarely drives a purchasing decision alone. Equipped with intelligence on the top value drivers influencing its customers’ decisions, our payment processor was able to increase prices with confidence.
Like many payment companies, this processor also added an inflation clause in their contract agreements allowing them to increase prices by a few percentage points (e.g., 2.9 percent) higher than the Consumer Pricing Index (CPI) every year. This makes pricing changes easier to enforce. A company should try to increase prices at the current rate of inflation as much as possible, with consideration for customers’ different degrees of pricing sensitivities.
Leverage data analysis to unlock insights
Data analysis is an important foundational step in any pricing initiative. When our payment processor conducted an in-depth examination of its existing portfolio, it uncovered widespread price dispersions where a large percentage of its customers were underpriced relative to their peers. While adjusting pricing for the new macroeconomic environment, the processor also had an opportunity to correct previous pricing mistakes.
Give customers flexibility to manage costs
Another important element when raising prices is to introduce greater flexibility for customers to manage their own costs. This can be accomplished by differentiating price levels. For example, our payment processor increased fees for credit card charges while lowering them for debit card charges. While the overall price level would still be higher, customers have the option to steer end-users toward lower-cost debit transactions.
Companies can also consider introducing a rewards program as part of a price increase initiative. Non-monetary incentives like platinum status customer support, exclusive invitations to events, and early access to new releases can go a long way to keep customers satisfied.
Prepare and involve the sales team
Any B2B pricing initiative should involve the sales team. This includes working with sales executives to come up with options for pricing models, concession strategies to guide negotiations, and value arguments to communicate price changes effectively.
Companies must be careful not to overfocus the discussion on the reasons behind the price increase. While the rationale behind price changes warrants a talking point, it is more important to discuss product improvements, added features, and upcoming enhancements introduced along with the price increase.
A price increase might also require a company to revamp its sales incentive structure. At our payment processor, the sales team's compensation was tied to volume which meant any volume loss would impact them negatively. In the new incentive scheme, sales executives got to share in the benefits of the price increase.
Aim for pricing excellence and get C-suite buy-in
Pricing excellence is a management issue and fundamental to the success of a company. There must be constant and thorough reporting, impact tracking, and pricing performance reviews. C-suite and upper management involvement is critical to set the tone and prioritize organizational goals. While a price increase enhances profitability, there is the risk of churn and volume loss. The management team needs to prioritize between the two competing goals of profitability and volume growth, as well as provide clear guidance on direction.
Price increases in times of inflation: Precision and timing are key
With soaring input costs eating into profitability, payment platforms need to respond with precision and in a timely manner. A well-executed pricing initiative can safeguard profitability, guide future price negotiations, and give the organization the confidence to price with ambition.