How to set prices in a B2B-environment?

Hi pricers - this is a great question that was raised in my linked in group, and that has spurred a lot of feedback from member pricers. I thought it was worth reprinting here because there are bound to be other pricers facing this issue or with valuable opinions to share. Warmly, EM

How do you set prices in a B2B-environment when there's no external reliable market information available? Do you just take the best information available, i.e. the insight of the sales team? (Kristof Fransen)

Umm generally, "insight" and "sales team" don't generally go together as their vested interest is in closing a sale. One approach is to look at the B-B contracts you already have, come up with an average of the discounts - say 60% off of list, for the accounts / products that are growing. Take this fact and compare it to the list rates for similar products from your competitors. Meaning, if you are giving on average, 60% discounts to a broad base of enterprise customers and winning business, then chances are, your competition is doing the same thing. A key assumption here is that your competitors have the same cost-basis as you do. Meaning that a large company should only compare itself to a large company regardless of the much smaller companies competing for the business. Much smaller companies have lower overhead, smaller support / pursuit / account teams and hence, can offer lower prices. This is why a large company should never (ever) compete on price with a company not on its level. Anyway, knowing that you give an average of 60% discount on your products (or whatever the number is), you just have to find the List Price for the product you want to price if already offered by your competitor and just match it or start with something a little lower. And then, do a classic cost analysis of labor, SG&A, product development, allocated costs etc to develop an in-house price floor that you must meet to cover costs and meet a certain direct / shared margin requirement or EBITDA target if that is your goal. Most B-B types like to have pricing at 20-35% direct margin over costs, so the trick is being able to hit this margin (or single digits) even -after-discounting the price 60% (or whatever your average was). That tells you what the market price should be. If your price is horribly skewed in relation to competitors, then work with the CFO and Product development to reallocate some costs to more profitable products to lower the price on your product /service. CFOs are good at the shell game of cost reallocation but that's another story.
(Samuel Mason)

If you do not have any external reference then I am assuming that your product or service is fairly unique? Have you tried to quantify the customer benefits or look at any Cost of Ownership analysis to try to understand what your customers are prepared to pay? Also, have you looked at what is your target customers next most preferred option to your product? This can give a valuable insight into the perceived value of similar offers and hence a guide as to your target price. You could of course ask a few select customers to tell you what they are prepared to pay or at least what they most value from a list of features & benefits. I face this problem all the time in B-B telecoms and have used all the above methods to realise high margin customer prices.
(John Burdass)

I respectfully disagree with the cost plus approach Samuel suggests. The real question is how much value are you delivering compared to the competition. Fortunately in B2B it can be easier than retail to quantify value. Either you are reducing cost or increasing revenue for your customer. Figure out how and where your product contributes to your customer's success, and you are halfway there. You also need to take a swag at how much value your competitors deliver. Hopefully, you deliver more, and can demonstrate and capture that value in price points. If you work on that info, your sales team can use that as well to drive higher price points. The more information and good price guidance you can give sales, the better off you will be. (Eric Ralph)

The issue of establishing price in a B2B world is one of establishing the value of the product or service. Unless you are dealing with commodities, stay away from cost based pricing as it will lead to an artificial price point that can be too high or too low (i.e. software is an obvious category).So value, how do you determine? Longer discussion than an online posting allows, but some common methods can be:
- Comparative evaluation: Using an existing competitor product that has an established price point, use a delta analysis to evaluate the impact of positive (and negative!) differentiators. i.e. do you use more or less power? does your product allow the customer to reduce overhead? etc. Generally differentiators should fall into two categories, reduces cost of ownership or enables incremental revenue. Of the two cost is your safer bet, as increased revenue is an assumption that is hard to prove (especially these days).
- Customer business case: Using your product, how does this effect the customer's P&L and based on the impact, what sort of payback period does your product have at various price levels. Determining appropriate payback periods is tricky as it is industry and situational, but overall I find for my products it can be anywhere from 6 to 24 months depending on the type of project.
- Competitive intelligence: While this is normally difficult in B2B situations where prices are not published, there are legal ways of getting the information. The best in my experience is looking for cases where the competitor has bid on governmental type projects that often require that the bid be "open". Sometimes there are industry events where there are "demonstrations" of product solutions that include example pricing. This is a dicey area, you just have to work on it.Most important though, there is no one perfect way... sometimes it takes multiple approaches to triangulate on optimal pricing. (Rick Robinson)