Most companies have adopted procurement management strategies to help drive better profitability by reducing costs. Yet, only a small number are effectively addressing pricing strategies to drive revenue, which is the other half of the profitability equation. Pricing is perhaps the most powerful tool corporate executives can use to affect the profitability of their businesses. Despite the fact companies lose deals when they fail to generate a profitable, competitive quote—or win deals but dilute the company’s bottom-line with less than optimal pricing—they haven’t invested in the technology available to avoid these pitfalls.
Pricing steps to B2B market growth
Business to Business (B2B) companies spent $3.2 billion on procurement software last year, according to a study from management consulting firm McKinsey & Company. By contrast, businesses spent less than $200 million on pricing optimization software. This despite the fact that as little as a one percent improvement in price can yield up to an eight percent increase in profit or more, as incremental dollars come at no incremental cost.
Yes, pricing optimization can be complex—given the various data sources and methodologies that go into its use as a key business decision-making tool. But it’s clear that sound pricing optimization can lower an organization’s risk in setting prices; provide visibility on the impact of pricing decisions; and arm the customer-facing workforce with real-time intelligence on how competitors are pricing.
Tips & tricks
To get you started on your pricing analysis, below are some tips and best practices for implementing effective pricing optimization within B2B markets.
Focus segmentation on what matters most to customers—While many organizations segment their markets by customer size, geography or product families, none of these categories focus on actual purchasing behavior; and each of these categories are treated equally when predicting an optimum price. Without understanding which attributes drive pricing behavior, however, companies are left with an incomplete picture of how to price more accurately. For example, a high-volume customer may be considered more profitable in terms of sheer purchases, yet a lower-volume customer may be more valuable in the long run, since he may be more loyal to your products. Pricing optimization software helps companies determine a handful of key attributes that drive pricing behavior, such as products bought by a customer, the quantity of rush orders or a local competitive situation—and it can weigh and categorize segments by behavior patterns, types of transactions and product selection.
Move beyond basic administrative rules—Most pricing optimization software applies basic administrative rules that help generate better pricing. Pricing managers typically use rules of thumb that are well-known throughout the organization. But a lack of robust tools prevents them from being uniformly applied. Because these pricing software tools only automate existing manual processes, they don’t fully exploit the potential of pricing optimization, which goes beyond the automation of simple rules and provides granular, customer-specific price recommendations based on all available data.
Hindsight may be 20/20 but forecasting is key—The growth of business intelligence software gives front-office employees the power to analyze large volumes of historical data. But in highly dynamic markets with volatile costs, fluctuating demand and evolving competition, looking at historical data is not enough. Pricing optimization technology analyzes trends in pricing and demand data and forecasts where prices are heading, not just where they’ve been.