10 Key Components of a Sustainable Pricing Strategy
Over the past 20 years, strategic pricing has become a core competency of many B2B businesses. With the amount of data and competitive awareness in the market, it’s difficult to imagine a company that hasn’t spent energy and resources on building and refining its pricing system. However, while many businesses have taken meaningful steps toward strategic pricing, there’s always room for improvement and refinement.
The recent swings in the economy reinforced the importance of a strong strategic pricing discipline. Companies with agile, easy-to-manage pricing systems were able to capitalize on shortages and inflation. Unfortunately, there were other companies whose inconsistent or manual pricing processes led to squeezed margins and a lot of legwork to even keep up with cost increases.
Step 1: The Foundation
Leadership by Leadership
Data to Drive Decisions
Cross-Functional Pricing Team
The first group of key components to a B2B pricing strategy lay the foundation for pricing success. Without leadership from the top, the right data, and a motivated pricing team that reflects the interests of each department, simply plugging in pricing analytics or software runs the risk of coming up short.
#1 Leadership by Leadership
When we asked our SPARXiQ team of experienced pricing experts to share tips for what it takes to be successful in a pricing initiative, one of the most common insights was the role of strong leadership. If pricing is a core competency of your organization, buy-in needs to start at the top. Our best-performing clients have senior leadership involved in their pricing initiative throughout the process, leading by example and holding their teams accountable.
#2 Data to Drive Decisions
We live in the era of “big data.” As such, any successful B2B company must build its pricing strategy around complete and accurate data. Customer transactional data gives you a clear lens into your own buyers’ behavior and price sensitivity across your business. There is a time and place for benchmarking your price against competitors, particularly in the age of eCommerce. Nothing tells you more about the price sensitivity of your customers than your own sales data.
#3 Cross-Functional Pricing Team
Pricing is not a job for one person or even one department. Companies who are successful in strategic pricing understand how significantly pricing impacts sales, marketing, operations, finance, and even IT. An ideal cross-functional pricing committee should include at least one person from each department. This team should be aligned in the organization’s pricing goals, meet regularly to review progress and work to continuously improve the system.
Step 2: The System
Meaningful Customer Segmentation
Granular Product Differentiation
Prescriptive Pricing Analytics
The next set of core components to your pricing strategy center around the actual pricing system itself: both the architecture and the analytics work together to provide your sales team with target price points for every sale.
#4 Meaningful Customer Segmentation
One of the areas where many companies spend their effort in building their pricing system is differentiating pricing standards for different customers. Most industries expect larger customers with higher spend to earn discounts when compared with smaller customers with inconsistent purchase patterns. While this is critical to stay competitive and be able to sell key accounts, it’s also important in segment by customer type.
If you’re selling to different types of customers – contractors, OEM, industrial, etc. – it’s important to recognize that they are buying your products for different reasons and have varying sensitivity to price as a result. Be sure that your segmentation aligns with the true price sensitivity of your different types and sizes of customers.
#5 Granular Product Differentiation
Like your customers, your wide variety of products represent a range of market competitiveness and price sensitivity. Profitable businesses in every industry capitalize on these distinctions and sell their different offerings at significantly different margins as a result. Be sure that your pricing structure allows for differentiated pricing standards for products based on the type of product, how it’s purchased, what supplier it comes from, and several other important factors. Ideally, each item (SKU) should have a unique margin applied to it that represents an optimal premium while maintaining its competitiveness.
#6 Prescriptive Pricing Analytics
Customer segmentation and product differentiation represent the structure that allows for strategic pricing. With that structure in place, leverage your data (#2 on this list, above) to determine optimal margins and list prices for your products. Many companies use velocity pricing to apply premiums. While that can be a starting point, more sophisticated analytical models provide a much more accurate level of detail that aligns your price points with the market.
Step 3: Company Culture
Sales Team Buy-In
Ease of Management
Clear & Actionable Reporting
The final four key components blend the foundation and the system detailed above and make the strategy a success. These final four components are often what separates the companies who are wildly successful from those who realize only modest gains.
#7 Sales Team Buy-In
Adoption and trust from the sales team is one of the most common concerns of companies exploring a strategic pricing initiative. Naturally, salespeople are sensitive to having to sell at prices they perceive to be higher than the competition. That’s why designing and implementing strategic pricing in such a way to reduce sales friction is critical.
To address sales’ concerns and maximize buy-in be sure:
- There is clear communication
- A rollout excludes each salesperson’s most sensitive customer/product combinations from changes
- Sales maintains its flexibility to adjust pricing to meet the needs of specific opportunities
#8 Appropriate Guardrails
With the flexibility mentioned in #7, also comes responsibility and limits. Price exceptions, or overrides, where salespeople deviate from the recommended system pricing, should have limits. Sometimes it can be beneficial to not impose any limits early on to achieve the sales team buy-in goals in #7 above. Once trust in the system improves, add sensible limits to restrict the team from over-discounting. Eventually, best-in-class companies even provide dynamic and situational discounting limits based on the product being sold and the customer who buys it.
#9 Ease of Management
These days, more companies who talk with us about their pricing goals are at least as interested in simplifying pricing management as they are in margin improvement. Recent swings in the economy have exposed flaws in pricing systems that require a lot of manual management and updating. Be sure that you’re differentiating your business in sensible ways and structuring your pricing around multipliers (cost-plus or list-down) that can be easily tweaked and maintained simply and globally.
#10 Clear & Actionable Reporting
Last, but far from least, it’s important to have visibility into not only the results of your pricing efforts, but also specific opportunities for continuous improvement. Our clients who have mastered pricing didn’t get there overnight; they started with easy wins, built trust in the system among the sales team (see #7), and then refined the system over time by reviewing data and monitoring trends. Be sure you have simple views for tracking continued progress in your pricing methods mix (use of system pricing vs. override or customer-specific exceptions), gross margin, and of course system utilization. Additionally, have visibility and a process for reviewing patterns where the system is underperforming to agree on moves to make as you continue to move forward.
Refine Your Strategic Pricing One Step at a Time
Long-term, sustainable pricing improvement doesn’t happen overnight. However, iterative improvements can lead to significant improvements in profitability and help your team build confidence that it can achieve even more success by continuing forward in its strategic pricing journey.
Be sure that you navigate your own pricing journey by building on a strong foundation, perfecting the best pricing system for your company, and making it part of your company’s culture.
Explore our resources to learn the benefits of mapping out a pricing strategy for your business.
A field guide that offers expert pricing advice
Pricing is a company’s most profitable business lever that impacts it’s bottom line. We’ve compiled strategic and tactical advice from eleven experts to help distributors and manufacturers excel at this initiative.