Why People Say B2B Pricing is Difficult
A misconception exists that business-to-business pricing is more complex than business-to-consumer pricing because many company executives or product managers think about business-to-business pricing in the wrong context. Allow me to explain...
Common Mistakes in B2B Pricing
One of the most common mistakes is to price to a competitor. It sounds easy. You look up a competitor's price and use the same one. Maybe you say to yourself that your product or service is a little better than the competitor’s and a little more comprehensive; therefore, you decide to set the price a bit higher. Or maybe the opposite. Perhaps your company says we are new to the market, or our product or service is not as comprehensive or complete as our competitors, so we price a little lower. This is, again, a serious mistake as pricing per a competitor is a sure way to leave money on the table.
Sources of Information
Based on the aforementioned mistake, many think B2B pricing is more complicated than B2C pricing. It is relatively easy to find a competitor's price in business-to-consumer pricing. You can look it up online, on Amazon, on the company’s website, or simply go to a brick-and-mortar store and look at the prices for your competitors' products. However, if you sell business-to-business, this is not so simple. For example, some service providers and SaaS companies quote their prices on their websites. However, as more and more companies learn about good pricing strategy practices, fewer companies are displaying prices on their websites. It becomes more difficult to find out how a competitor prices their products or services in the B2B space than in the B2C space.
The Real Problem with B2B Pricing
The real problem with pricing to a competitor is that, first of all, you don't know how the competitors set their prices. Chances are they simply guessed, used their gut feeling, or maybe set a price that felt good to them. They might have used “cost-plus” in some form, meaning they added a fixed margin on top of the cost. None of these pricing methods has anything to do with what the customer is willing to pay for the product or service. They have no relation to the maximum monetization of the value of the seller's benefit to the customer—neither in B2B nor B2C.
Your Guess or Mine?
Chances are high that if you set your price to a competitor, it is to the price of someone who guessed. Of course, we have the “fluff factor” - companies that think their product or service is a little better. Therefore, they estimate a premium on top of the competitor's price. They may feel the product or service has fewer benefits, and the company sets the price a little lower. So, companies that set their price to a competitor's price start with a reference point, most likely a guess, and then the “fluff factor” is added on top of the guess - which is yet another guess. How can this be the right price?
Does Your Product Give You a Competitive Edge?
Pricing to competitors has another problem - it leads to commoditization. In many cases, pricing to a competitor indicates that the product or service is substantially similar to that of the competition. It is often because the company simply looks at the competition instead of truly understanding their customers. There is no pricing power if the product or service is not differentiated from the competition to meet customer needs better. The product or service is a commodity, and commodities are only sold at a low price. The flip side is also true. Meeting customer demand in a meaningful way leads to a greater willingness to pay.
The Role of Your Customers
The right way to price is to understand in detail what your customers are willing to pay for, and particularly, for what they’re willing to pay extra. If you develop this understanding, you can differentiate your company, product, or service to defend higher prices and higher sales volume – all at the same time. As a result, you have gained pricing power.
Pricing Power in Your B2B Pricing Decisions
In closing, the reason so many people say that pricing in B2B is more difficult than pricing in a business-to-consumer model is simply that they are taking the wrong approach. They think it's all about pricing to competition or pricing a little higher or lower than the competition. The competition should not be ignored, of course, but taking the easy way out by setting your prices to the competition’s is not the right method. Instead, you want to know exactly what your customers are willing to pay so you can make the right pricing decisions that gain pricing power.
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