The Keys to Increasing B2B Pricing Power
In this article, I will examine the top ten actions a company can do to increase its B2B Pricing Power, meaning its ability to charge higher, more profitable prices at the same time as sales volume stays the same or increases and customer satisfaction also increases. Don't you think it is possible? Well, it is. Trust me. It is all about using a business process and strategy aligned around developing a detailed understanding of what a market is willing to pay for your product or service.
B2B Pricing Power Key #1: Markets and Segments
It has been estimated that more than 80% of the sales calls in the United States are made to the wrong person. Nearly every Sales VP I've asked about this has been comfortable with the estimate, but rarely do they know what to do about it. Instead, they resort to saying, "selling is simply a numbers game - the more sales touches with potential clients, the higher the sales volume." This is true but leads to a sales process that is often inefficient. Clearly, there is some level of mismatch between the sales efforts of most companies and the actual marketplaces their companies serve.
One consequence of the attempt to sell to "everybody" is the downward pressure it exerts on price. As companies attempt to close buyers who are not squarely responsive to the company's value proposition, the natural reaction by sales is to lower the price (or raise the discount) to make the offering more attractive. As companies make this a habit, they begin a fruitless search for the price that will make customers buy. The remainder of this article will set the framework for a more productive approach.
The sad state of affairs described above results from an imprecise process across the entire company. It starts with a market definition: how well does the company understand who buys its products and services? How well does it know the whole decision landscape of its buyers? The decision landscape includes buyers' value drivers, their purchase drivers, and their price drivers. It has heuristics, prior experience, and various influences. Developing a detailed understanding of the decision landscape and how it affects customers' willingness to pay is the first step to establishing B2B pricing power and a better focus on the sales and marketing process.
Value Drivers are the elements of your offering that build a perception of value on the part of people who buy, creating a desire to buy.
Purchase Drivers are the elements that influence people to make a purchase
Price Drivers are the elements that influence buyers to decide to pay more than they would have to pay for similar offerings
Heuristics include the prior experience of a company, a product or service, competitors, and alternatives. It provides advice from influencers and what a buyer may have read or heard about a product or service.
Suppose a company does not know how each of the above affects what a customer is willing to pay for its product or service. In that case, it is impossible to set prices that accurately reflect buyers' value of your products and services. The company uses imprecise pricing methods like cost-plus, tag price to computers, or "market price," which is a euphemism for guessing. Pricing methods will guarantee that the company leaves money on the table.
The Iron Law of Pricing says, "Different buyers will value your products and services differently at different times." And that means that you can leverage this into different prices for different levels of your buyers' urgency. We are all familiar with the cold soda at the grocery store's checkout line - where a small can or bottle is often more expensive than the same product in a 2-liter bottle at the back of the store. Likewise, I often illustrate the Iron Law of Pricing with the willingness to pay for a commodity like gas. If you are running low on the way to the hospital with a sick child, your willingness to pay for that gas is probably higher than if you are on the way to the inlaws! Think about this in the context of your company. What will generate an urgency to purchase at higher prices? How can you leverage that urgency?
The prospect share of a market typically consists of 2-4% of the total market. Those are potential buyers about to purchase within a reasonable timeframe. When you factor in that 80% of the sales calls are made to the wrong person, meaning someone who is not in the market to buy for various reasons, it is easy to understand why most companies struggle to sell to new customers and growth becomes a struggle.
Segments are subsets of the marketplace that respond to similar value drivers. The factor that separates one segment from another is called a discriminator. Common discriminators might be company size, industry, or location. Unfortunately, this is not good enough. While using simple discriminators like these are better than not segmenting the market at all, we have to drill down deeper and understand how and why a company makes its purchase decision. What process do they use, what are the use cases, and how do different use cases affect what companies are willing to pay. For example, consider the IT department of a company. A marketing message leading to "with our product, you can go home early" probably will resonate with the IT manager and less so with the CIO, who probably have other priorities.
Furthermore, if what your company is selling is costly, the situation becomes more complex - the CIO may be the ultimate decision-maker and the IT manager(s) influencers. They don't have the budget to say "yes" to a purchase, but they indeed say "no" and prevent a purchase. Thus, it becomes crucial to understand the decision landscape and willingness-to-pay of both the actual decision-maker and influencers and, through the sales process, use appropriate messages for both.
The Iron Law of Pricing governs how you approach segments since different segments will be willing to pay different amounts for your company's products or services. A key element of driving price performance is to leverage this law with other messages, bundles, and content and set prices that accurately reflect the value different segments place on your offerings in the prices you charge for those segments.
To maximize the value from this segmentation, it becomes crucial to understand what each segment is willing to pay for your product or service and how different messages, marketing, sales channels, etc., affect what each segment is willing to pay. Again, this must be done from willingness-to-pay research. Testing or asking customers won't work!
Bottom Line: Without careful market definition and management discipline, most sales calls will not result in sales or even customer interest and engagement, and the deals that happen may be deeply discounted, zapping a company's profits. The level of waste can be as high as 90%. To optimize your prices, focus product development, marketing, and sales on buyers willing to pay more for your distinct differentiators.
B2B Pricing Power Key #2: Put Buyers' Concerns at the Center of Everything You Do
There is a whole industry, an entire population of consultants making a living telling executives and salespeople to "Sell Value." Some even go so far as to list the elements of value which often end up being the same for every company they work for: quality product, prompt delivery, low price, good service, and knowledgeable staff. There are two problems with this approach. First, if everyone offers the same value drivers, we have a commoditized market, and buyers will decide based on price, and low prices will win. Second, it ignores individual buyers' concerns about buying decisions and their decision landscape.
People do not buy products and services because of what they do. They purchase products and services to solve a problem or gain a result. They try to seek a solution or respond to solicitations because they have a vexing concern and wish to resolve it. Trying to spin generalizations about value, quality, and good service into a defensible pricing strategy is doomed to defeat. There is a better way.
I cannot tell you the number of companies I see who put out a seemingly endless proliferation of confusing and often worthless information to educate their customers. I am astonished at the number of companies who arm their salespeople with a standard PowerPoint deck (and sometimes a script) and tell themselves they have trained their salespeople and are educating their customers. Educating your customers must precisely deliver the information specific customers need to purchase your product and be willing to pay a premium price for it. Buyers need to know how your product will satisfy their needs as they understand them. This means that first, you must know how any individual buyer perceives their problem or how they define the result they believe they need. You must offer a buying experience that begins with the customers' perceptions and understanding of their problem, and only then can you start the education process.
Just thinking about your company's marketplace in terms of the problem the company solves changes your whole viewpoint. Instead of just telling people what the company does, the conversation needs to be about asking customers what they need—instead of trying to educate prospects on the company's products or services, showing them how to solve their problems, which, by default, requires an understanding of the customer's problem. Now, focusing on problem-solving is true to a point. You probably have similar experiences to me - I have seen websites full of benefits statements missing what the company does. What a company does can sometimes be so muddied that it is impossible to decipher if it sells a product or service.
This change in viewpoint carries over into pricing. If you think about "what we do," you will tend to base your prices on your costs. So, the relevant metric becomes, "what does it cost me to make and deliver." But when you orient your prices to your customers' problems, the relevant metric becomes "How much is it worth to solve this problem?" which is generally a higher number.
The change in viewpoint carries over into customer support as well. Customer support can be "good enough" it shows the customer how to use the product. But it can be great only if it shows the customer how to solve his problem.
Moving the customer to the center of your thinking will change nearly every aspect of your business.
B2B Pricing Power Key #3: Conversations
Perception of value for your organization arises from your conversation with your marketplace. The conversation is the totality of everything you say and do in your marketplace. Every word and action either builds up or reduces the buyer's perception of your value. I'm using the word conversation here as its most expansive interpretation, including face-to-face meetings, zoom, phone calls, website, social media, advertising, and what influencers may say about your company.
You have different conversations with different companies depending on the nature of their relationship with you. If this is the first time you are speaking to a prospective buyer, you will have one type of conversation. The discussion will likely be very different if the buyer has been a customer for a long time. This much is obvious. But what companies often miss is that the value drivers of these different constituencies are very different as well. The drivers of customer satisfaction are rarely the same thing as the purchase drivers that influenced buyers to purchase from you initially. The best example of this confusion is the reliance on customers to tell you why they buy from you. Customers may value a quality product, prompt delivery, low price, good service, and knowledgeable staff because they have experienced them. But these attributes often fail to operate as purchase drivers or price drivers. Sadly, they are challenging to manifest in a sales process. Everyone will claim these same value drivers. Have you ever heard a salesperson acknowledge, "We have a crappy product, and we deliver slow"? Of course not. So, these satisfaction drivers are essential for keeping customers, but they will rarely lead customers to buy from you. (Note: There are a few markets where these offering elements are generally unavailable, so a company that offers them can use them to win business at higher prices. But most of the time, they are just "table stakes," it is necessary to claim them just to be considered. By themselves, they will rarely win business, even if they are true). Successful companies find a way to show the value that prospects can understand and believe.
We said the conversation is the totality of everything you say and do in your marketplace. What are the elements of the conversation? We can break down the discussion into touchpoints by borrowing a construct from the customer service measurement folks. Once we know that overall we are working to build the perception of value, each touchpoint can be evaluated in a different light.
Advertising needs to be crafted to eliminate those who are just curious and do not have a purchase intent.
Telemarketers can leave a well-crafted message rather than just setting appointments with the people they reach.
When you qualify a prospect, take care to do it in such a way as to add to their perception of your value.
Never"wing it" on a sales call. Prepare each one carefully and treat it as a comprehensive platform to build a perception of value for the future and the present.
Think about the conversation in the context of Apple, which is famously fastidious about the packaging of its products. The care and craftsmanship they lavish on the cardboard box that holds the iPhone is a monument to their devotion to even the smallest element of the conversation. It creates customer satisfaction and a desire to repurchase the product whenever the next model comes out.
Once companies have enumerated every touchpoint, they can provide the resources, guidance, and direction to ensure that each one carries its due weight in terms of building the buyer's perception of value. Our experience is that it rarely costs much more to do this. It just takes work.
B2B Pricing Power Key #4: Value Perceptions
Most managers recognize that it is vital to understand the value perceptions of the individuals and organizations that purchase their goods and services. But rarely do they make a concerted effort to figure out what they are and shape them. And even more seldom do these take the extra step and understand how these perceptions affect what customers are willing to pay
First, we must define more precisely what 'value perceptions' are. Only with a clear understanding of what they are will we be able to work with them.
Value perceptions that matter in a business measure the importance, rankings, and weightings that potential buyers ascribe to your offering.
Your offering is composed of elements. The crucial aspects of the offering are attributes that either raise or lower the perception of its value. The practical elements (positively or negatively) are called value drivers. We find that companies are generally inaccurate when asked to identify, measure, or rank the elements of their offering that function as value drivers. This gives rise to the infamous 'Death by PowerPoint,' where salespeople spend (what appears as hours for the client) talking about their products and services, only occasionally sparking interest or gaining traction. A retail environment gives rise to dense, uninformative, and overly complex packaging. A distribution environment leads to excessive reliance on price-cutting and discounts. It gives rise to advertising that is vague and ineffective. Finally, it explains why many websites are poor at converting lookers into buyers. Unsure of which of their offering's elements create the perception of value, marketers put out there far too many, leaving it to buyers to find the ones that matter to them.
Value perceptions are an area of considerable confusion as companies try to determine how to market and sell their services. Some managers believe the bedrock of their value perception is the Return on Investment (ROI) they can generate. These managers devote time, talent, and energy to building models that show astonishing results ("Payback in less than two months!"). Others prefer not to deal with it at all, outsourcing the task of building perception of value to their sales force. These managers find a few who are capable, and the rest struggle with the task. Few have approached the task of determining how they are perceived in the marketplace. Still, fewer actively work to manage their value perceptions in an organized way.
Another version of ROI pricing is Economic Value Pricing (EVP), and some famous pricing thought leaders say this is the holy grail of pricing. In short, EVP relies on the buyer "opening up the kimono" with such detail that the vendor can assess what economic value the product or service they try to sell will give the buyer. I've written a lengthy article on why this is a pipe dream invented by academia and consultants with no actual business experience.
Having said that, the customer will most likely make an ROI or EVP calculation, especially if what they are about to buy is costly. As a seller, you can always ask them to share that; if you are one of the lucky few, they may do so. But it is unlikely.
B2B Pricing Power Key #5: Options
Options can play an essential role in building margin. With careful attention, you may be able to charge a price for elements of your offering that you previously included for free. In addition, you can use options to highlight essential features of your offering that once went unnoticed and unappreciated in the sales and pricing process.
First, let's define what an option is not. An option is not a component of your offering that is necessary for it to function for the average user. Several years ago, as automotive manufacturers began to offer packages of options on their products, an influential comedy sketch suggested that soon tires would be "optional." Since tires are essential for the regular operation of the automobile, making them "optional" is a transparent ploy to garner extra revenues. If an element of your offering is essential to the regular use of your offering, it cannot function as an option.
But if an element of the offering is essential only to a specific segment of your marketplace, offering it as an option will have two significant benefits:
It will enable you to charge an extra price, growing your revenues without raising your prices.
It will highlight your ability to serve the needs of that segment, showing that you have a specific solution to their needs.
In a competitive situation, even if your competitors offer the same functionality as part of their product, their salespeople are at a competitive advantage as they struggle to make it appear as unique, as necessary, as you're offering it as an option with its name, description, and marketing support.
One B2B custom research company differentiated itself from its competitors by guaranteeing a specific level of statistical significance. This distinction did not enable the company to charge higher prices than its competitors but offering a low-price (no statistical significance guaranteed) version and making statistical significance a higher-priced option enabled the company to highlight the benefits and earn higher prices in its marketplace. Properly designed options are a powerful tool for building a perception of value.
Properly designed, options based on a clear understanding of who uses your product and how they will use it will also add important numbers to your sales performance and price performance.
B2B Pricing Power Key #6: Bundles
Bundles are packages of two or more products that solve a specific customer problem. Bundles operate as a mechanism for you to communicate your ability to solve particular problems and often charge a premium price for it. For example, a bundle of two cents worth of ammonia, a half-cent's worth of water, a spray bottle, and a drop of blue dye is a bundle that solves the problem of dirty windows and sells for $4.29 or thereabouts. Note: there is no requirement for all of a bundle's components to be manufactured by your company. Some of the most successful bundles combine the vendor's product with items from other companies, again, into a solution.
Bundles can serve four essential functions in the pricing strategy.
First, they are a revenue opportunity in their own right. If you have successfully identified a customer need, a bundle enables you to target it, solve it, and charge a premium price.
Second, they highlight your ability to solve a particular problem, building the perception of value even for buyers who do not purchase them. Your company will appear more valuable if it offers bundles that solve recognizable issues.
Third, they enable you to address markets that may have been previously closed to you. A bundle that repackages existing products into a solution to someone's problem is a relatively inexpensive way to enter a new market.
Fourth, they enable you to test various value messages without diluting your brand identity.
Using bundles as a pricing strategy should be an ongoing process. A company that offers just one or two bundles will not see the level of success the strategy can produce. Continually creating and evaluating bundles will enable you to develop the culture and the capability to rapidly identify customer problems, assess what they are willing to pay to solve them, and offer a solution. A company that can do that on an ongoing basis will continually be successful.
B2B Pricing Power Key #7: Content
In a media-saturated world, losing sight of the additional value appropriate content can add to your products or services is easy. As a result, media (3D models, video, audio, graphics, text, and images) deserves center stage at nearly every prospect and customer touch point.
For prospects, a well-designed video still adds to the perception of value. It also conveys images that remain with the viewer long after the video is forgotten. I am surprised how many companies support their products with so few pictures, charts, and diagrams. Many of those who put up pictures make them so small and uninspiring.
For customers and users, a video showing how to assemble the unit, set it up, and enjoy it will significantly increase their satisfaction with the product.
That being said, the main area where media (written, graphically, or textually as well as video) can add value is in the documentation of how to use the product. If you can show users how to do something they want to do, you go a long way to building the perception of value. Suppose you pay close attention to how customers are using your products and show each separate usage in your conversations with your marketplace. In that case, you will distinguish yourself from your competitors and generate a feeling of comfort with your products that will support higher prices.
One key usage area where most products fail to support their users is in interfacing them with adjacent systems and processes. Whether the product is hardware, software, a business service, component, or a complete solution, it must always fit into the customer's more extensive business processes. If you identify the points of contact and document how to accommodate them, again, you lay the basis for being able to charge more for your products and services.
B2B Pricing Power Key #8: Differentiators
Why do people REALLY buy from you?
Most companies I talk with THINK they know, but as we dig into it, a different picture emerges. For example, the well-known management expert Peter Drucker has said, "Customers rarely buy what organizations believe they are selling." In this observation, he reminds us that nearly all selling organizations struggle to precisely define, act on, and inject the actual reasons that drive customers to buy their products and services into the sales process. The uncertainty inhibits their ability to sell their products effectively and to set prices that correctly reflect the value they are delivering.
Customers buy from you, and prospects choose you because they perceive something unique that you bring to the marketplace. They buy from you the first time because you promise them something different from what your competitors offer. But very few companies can articulate what that is. For example, I recently attended a conference of the International Institute for Ammonia Refrigeration (IIAR). As I spoke to various exhibitors, I asked each, "why do customers buy from you?" Nearly all said the same thing. "We offer a quality product, reliable delivery, and when there is a problem, we make it right." The fact that they all differentiated themselves exemplifies what Drucker was talking about. A week later, I was in the office of a midsized printer and asked him the same question. And I got the same answer! "quality product, reliable delivery, and good customer service." Again, nearly all companies differentiate the same - which is no differentiation.
The sad fact is that you will continue to struggle with pricing, sales, and profits without a clear vision of what your customers perceive as your unique differentiators. So, for many companies, there is work to do - but the return can be a spectacular increase in B2B pricing power.
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