Defining a pricing strategy for margin improvement is a challenge for companies, B2B and B2C. A wide range of factors must be taken into account. Factors that can often change unnoticed, so that your product price is no longer optimal. It is possible to divide all these factors into three different dimensions: product, customer and situation.
Product: The product dimension contains factors such as product costs, profit margin and variant costs that determine the price of a product.
Customer: The customer dimension is usually only relevant for B2B companies and not for B2C companies. In this dimension for the construction of the price, the relevant size of a customer is considered; is it, for example, a key account, a smaller customer or a freelancer?
Situation: The situation dimension contains dynamic factors that can influence price such as season, competition, delivery times, associated costs and other matters.
Many B2B companies already use the product and customer dimension with which the price can be calculated for the right customer and product combination. However, these have not yet been optimized for margin optimization. Also relevant market factors are taken into account to a limited extent with this static model.
B2B vs B2C
It is easy for B2C companies to adopt product specific price variables as well as situation specific variables in a price model. This is because there is usually a generic price for all products at webshops or retail. In B2B however, one usually has to take into account customer groups that provide extra complexity.
For example, where consumers often only need one specific cable, customers of B2B companies can often need 100 or 1000 copies of the same cables. As a result, B2B companies often segment customers according to the size of the company that buys from them. For example, a different discount can be given to key accounts, smaller customers and freelancers. This makes the customer dimension essential for many B2B companies and a lot less relevant for B2C companies.
As mentioned before, companies often only use the product and/or customer dimension, which means that the pricing model is often static. In addition, it is also not possible to include purchasing behavior in your price structure in such a static model. This makes it difficult to optimize profit margins for B2B companies. However one can easily optimize margins with the right data and tools.
Let’s look at a fictional example of how a cable shop can move from a segmented pricing model to a dynamic pricing model.
B2B Pricing: Segmented Pricing
Most B2B companies start by setting a price with the product dimension, just like many B2C companies. As you can see in the image, most companies first start by taking an inventory of the cost of a product. By adding a certain profit margin on top of that, they come to a base price. However, it often happens that as a B2B company you have several variants for your product, such as a cable. These cables can vary slightly in size, quality, length, color, etc. As a B2B company, you usually set different prices for all these variants. Sometimes slightly more expensive and sometimes slightly cheaper than the other variations. Most B2B companies offer different prices for these variants.
But where B2C companies often stop at this step because they do not distinguish between customers, B2B companies go a step further by segmenting the customer groups by size.
In the customer dimension, the price from the product dimension is often reduced by giving a discount in proportion to the size of the customer. For example a multinational that wants to buy 10,000 of the same type of cables, could possibly get a 20 – 30% discount.
If, on the other hand, a small shop around the corner needs a product, this can be a lot less, for example only 5%. By giving this discount, which many B2B companies do, they arrive at a net price. However, this is where many B2B companies stop adjusting the price to the buyer and leave a lot of margin on the table.
B2B Pricing: Dynamic Pricing
To make the step to dynamic pricing, you as a B2B company can think about applying situation-specific factors. In the situation dimension you can include factors such as season, competition, fast shipping, custom services and, for example, special event days. By charging a certain discount or premium for each of these factors, you as a B2B (but also B2C) company can come at the right price in every scenario.
For many companies it is almost impossible to include so many different factors in the price for all the products they have and to be able to adjust them constantly. That is why many B2B companies now only use segmented pricing instead of the better dynamic pricing. Therefore, to take the next step, companies could use pricing software to automate and optimize this process.
SYMSON Dynamic Pricing software
SYMSON makes it easy to automate and optimize your pricing strategy. As a company, you can copy your segmented pricing in the software and work from there to a dynamic pricing model with the elements that are important to your company. This can be done per product, but also per product group.
In addition, it is also possible to apply a key-value item pricing strategy to your product catalog. With this strategy you price price-elastic products competitively to get customers to your wholesaler, webshop, etc. and then take the profit on other products that you sell. This way, companies can also apply a form of dynamic pricing in the product dimension.
Do you want to know more about how you can go from a static to a dynamic pricing model? Do not hesitate to contact us!
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