What’s the best way to price your product or service for business to business (B2B) marketing? This is one of the most common questions B2B marketers have, and pricing your product or service wrong can be a disaster.
Pricing must take into consideration customer demand, price sensitivity and elasticity, the competition, and market conditions. Customers will be more sensitive to prices if they know there are substitutes or if they think your product lacks differentiation. The demand for your product will be less elastic in response to a price increase if customers know that there is little competition out there, if customers are not apt to change suppliers often or if it appears that your product has a competitive advantage.
Many businesses price on a cost-basis, which includes fixed overhead costs such as utilities, salaries, rent and other costs that do not vary, and variable costs such as labor and materials. But with cost-basis pricing, you may be leaving money on the table. If you are able to differentiate yourself from your competition, there is a better way to price.
A value-based pricing model that has proven to be a real differentiator in today’s value-oriented culture. This model includes calculating the actual bottom-line improvement your service/product creates for your customer and demonstrating that value to them in your sales conversations and in your marketing. According to Daniel Feiman, Strategic Planning/Financial Consultant and Managing Director of the consulting firm Build it Backwards, a great book on this topic is Value Merchants: Demonstrating and Documenting Superior Value in Business Markets by James C. Anderson, Nirmalya Kumar, and James A. Narus.
Some Pricing Issues
Be careful about reducing prices as a promotional effort to increase sales. In some industries a price drop indicates a decline in value or in quality and may be a detriment to sales. Instead, price increases can be used to close more sales before an increase is in effect, but they will not be effective if demand for your product is elastic due to lots of competition, ability of buyers to change vendors easily, and lack of differentiation.
Other problems with pricing include too much emphasis on cost and not enough on profit, failure to change prices with a changing market, prices that are not tied to positioning which affects the perception of the product, and lack of customizing prices to markets and product variables. When a company determines its pricing strategy, it is essential to communicate that clearly to marketing and sales as well as other departments.
How do you price your products? What works, what doesn’t?