In the B2B pricing space, determining pricing corridors is a vital strategy for businesses looking to balance competitiveness with profitability. Essentially, it's pricing for channel partners to ensure certain profits that each channel can keep.
A price corridor is a range within which prices can fluctuate without significantly impacting customer demand or brand perception. Corridor pricing has a floor price and ceiling price to determine the limit. Within this boundary, the salesperson is free to negotiate a price with the channel partners like distributors, wholesalers and retailers. If your team fixes a price beyond your price corridor, it would attract escalation.
Understanding and effectively implementing corridor pricing can significantly enhance a company's price optimisation strategies, especially in the complex B2B landscape. Now, let’s break this down further in this blog.
What is Corridor Pricing?
A price corridor is one of the B2B pricing strategies that helps companies maintain profit while also matching their customers' willingness to pay. It is essentially a form of stepped price segmentation, that offers lower prices to customers purchasing in higher volumes. This segmentation, influenced by discounts and incentives, takes on the appearance of a corridor.
For effective pricing analytics in this scenario, it's crucial to allocate all discounts and bonuses explicitly to each product or product group. Additionally, categorising customers, perhaps by region or type, is often necessary. It's also crucial to standardise transport, freight costs, and taxes.
Also Read: How to Optimise Discounts in B2B
What is a Floor Price and a Ceiling Price?
Corridor pricing refers to setting a floor price and ceiling price for products or services. The floor price is the minimum price a company is willing to accept, often covering costs and ensuring a basic profit margin.
On the other hand, the ceiling price is the maximum price that customers are willing to pay before seeking alternatives. The difference between price ceiling and price floor forms the pricing corridor.
What is Target Pricing?
Target prices are often set within a price corridor at a level where there's a high likelihood of customer acceptance and positive purchasing decisions. These prices are commonly applied in scenarios specific to individual customers. Offering a degree of flexibility, target prices allow businesses to adjust their pricing strategies according to customer responses, market conditions, and overarching business objectives.
What is the Difference Between Price Ceiling and Price Floor?
The primary difference between the floor price and the ceiling lies in their purposes. The floor price is about cost-recovery and profitability, ensuring businesses don't sell at a loss. On the other hand, the ceiling price is about capitalising on market value without exceeding what customers are willing to pay.
The Role of Pricing Corridors in B2B Pricing
In B2B pricing, corridors are especially relevant due to the varied nature of bulk transactions, long-term contracts, and the nuanced understanding of value amongst different customers. B2B pricing strategies often involve a detailed price corridor analysis to determine the optimal price range for different market segments or products. This analysis helps in understanding the price elasticity and how it impacts volume and profitability.
Business Outcome or Benefits of Using Pricing Corridors for B2B Pricing
Pricing corridors are an essential strategy in B2B business, helping to balance profitability with market competitiveness. They involve setting a range for product prices – a minimum (floor price) and a maximum (ceiling price) – within which a company can adjust its prices. Here's how pricing corridors benefit B2B businesses:
1. Flexibility in Pricing: Pricing corridors provide a range within which prices can be adjusted, allowing businesses to react to market fluctuations, customer demands, or competitive pressures without needing to revamp their entire pricing strategy. This flexibility helps in maintaining a strong market position.
2. Ensuring Profitability: By establishing a floor price, businesses ensure that they never price their products or services below their cost, safeguarding their margins. The ceiling price, on the other hand, is the maximum customers are willing to pay, allowing businesses to maximize revenue where possible while remaining competitive.
3. Catering to Different Customer Segments: Businesses can offer competitive prices to different customer segments with pricing corridors. For example, larger volume buyers can be given prices closer to the floor to encourage bulk purchases, while smaller buyers might see prices nearer to the ceiling. This flexibility helps in catering to a diverse customer base while maintaining profitability.
4. Maintaining a Competitive Edge: Pricing corridors allow businesses to quickly adapt to competitors' pricing strategies. If a competitor lowers their prices, a business can respond within its pre-set corridor, ensuring they remain competitive without compromising on profitability.
5. Strategic Control Over Pricing: This approach gives businesses more strategic control over their pricing. Instead of reactive, ad-hoc pricing changes, companies can plan their pricing strategies within the set corridor, preparing for various market conditions and scenarios.
6. Reduced Risk of Price Wars: By having a clear floor price, companies avoid engaging in detrimental price wars. This ensures that pricing remains sustainable and profitable in the long term.
Overall, pricing corridors in B2B businesses offer a structured yet flexible approach to pricing, balancing customer satisfaction, market competitiveness, and profitability.
How to Build a Pricing Corridor for a B2B Company?
Building a price corridor for a B2B company involves creating a flexible pricing structure that adapts to market conditions while safeguarding profitability. This strategy is particularly effective in the B2B sector, where pricing can be complex due to factors like volume purchases, long-term contracts, and diverse customer needs. Here’s a step-by-step guide to developing a price corridor for a B2B company:
- Understanding your costs and business goals:
Before setting any prices, thoroughly understand your cost structure and define your business goals. Assess all direct and indirect costs associated with your product or service, and determine what profit margin aligns with your long-term business objectives. This foundational step is crucial for informed pricing decisions.
- Segment Your Customer Base:
Segmenting your customers based on factors like purchase volume, industry, and loyalty can help in applying the target prices effectively. This segmentation ensures that your pricing strategy aligns with the specific characteristics and needs of each group.
- Determine Your Floor Price:
Start by calculating your floor price, the minimum price at which you can sell your product or service without incurring a loss. Consider all your costs – production, operational, and overhead. This price should ensure that each sale contributes positively to your bottom line.
- Establish Your Ceiling Price:
The ceiling price is the highest price the market will accept for your product or service. It's not just about the maximum price but also about understanding the value proposition of your offering. Consider factors like the premium features of your product, exclusivity, and how your product compares with competitors in terms of quality and performance.
- Identify Target Prices:
Target prices are specific price points within your corridor that are ideally suited to different customer segments. This involves understanding the unique needs and value perceptions of each segment. For instance, larger clients might receive a target price closer to the floor to incentivise bulk purchases, while more price-sensitive segments might have target prices set nearer to the middle of the corridor.
- Incorporate Negotiations and Discounts:
In B2B, negotiations are a key part of the sales process. Your price corridor should allow room for these negotiations, ensuring that even after discounts, the prices stay above the floor price.
- Regularly Review Your Pricing Strategy:
Market conditions, customer preferences, and costs can change over time. Regularly review and adjust your pricing corridor and target prices to ensure they continue to meet your business goals and market needs.
How to Set Corridor Pricing in an AI-Powered Price Management Software?
Building pricing corridors with AI-powered Price Management Software streamlines and enhances the process with data-driven insights and automation. Here’s a step-by-step guide on how to leverage such software in creating effective pricing corridors:
1. Integrate Data Sources: Start by integrating your internal data (like sales, costs, and historical pricing data) and external data (like market trends, competitor pricing, and customer insights) into the software. This comprehensive data integration is crucial for accurate analysis.
2. Analyse Costs and Set Floor Prices: Use the software to analyse your complete cost structure, including variable and fixed costs. The AI can identify the minimum price at which you can sell each product or service (floor price) while remaining profitable, considering all cost factors.
3. Market Analysis for Ceiling Prices: The software can analyze market data to identify the maximum price (ceiling price) customers are willing to pay. It considers factors like competitor pricing, customer perceived value, and market demand trends.
4. Segmentation and Target Pricing: AI-powered software excels in segmenting customers based on buying patterns, preferences, and price sensitivity. Use these insights to set target prices within the corridor for different customer segments, ensuring tailored and competitive pricing.
5. Dynamic Pricing Adjustments: The software can continuously monitor market conditions, competitor moves, and customer behaviour, adjusting the pricing corridor dynamically. This helps in maintaining competitive and profitable pricing in real time.
6. Simulation and Forecasting: Leverage the software’s simulation tools to forecast the outcomes of different pricing strategies within your corridor. This can help in understanding potential impacts on sales volume, revenue, and profit margins.
7. Implement and Monitor: Implement the pricing corridor across your sales channels. The software can monitor performance in real-time, providing insights into how the prices are received in the market and their impact on sales and profits.
8. Continuous Learning and Improvement: AI-powered software learns from outcomes. It refines its analysis and recommendations over time, leading to increasingly sophisticated pricing strategies.
9. Feedback Loop for Refinement: Utilize the software’s analytics to create a feedback loop. Regularly review and refine your pricing corridor based on the software’s insights and market changes.
10. Integration with Sales Strategies: Ensure your sales team understands the AI-driven pricing corridor. Provide them with the tools and training to negotiate and sell effectively within these new pricing guidelines.
By using AI-powered Price Management Software, businesses can build and manage pricing corridors more efficiently and effectively, leading to optimized pricing strategies that are responsive to market dynamics and customer needs.
In B2B pricing, corridors serve as a strategic tool to navigate the complex pricing landscape. By understanding and implementing effective corridor pricing, businesses can protect their margins while remaining competitive. It's a balance of analytics, strategy, and understanding of market dynamics. As businesses continue to evolve and markets become even more competitive, the role of pricing corridors as part of a comprehensive b2b pricing strategy will undoubtedly become more critical.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!
