In B2B, pricing is a broad and complex practice. There are a lot of elements fighting for attention and it’s hard to know where to focus to have the greatest impact. We are often asked what’s most important when it comes to pricing improvement.
Of course, every situation is somewhat unique and what's most important at a particular point in time can vary greatly, firm to firm. But when you step back a bit and ask a slightly different question, it's possible to identify a small handful of areas that are far more powerful than others.
So here's a question for you to ponder:
If your pricing function could excel at three things—and only three things—what would those three things be?
Questions like these are good "forcing" mechanisms. They force you make tradeoffs and delineate between the core elements and the nice-to-haves. They force you to get beyond the hype and think about where the real pricing power lies. And, questions like these can help you prioritise your efforts and focus your approach.
Our top three picks are:
- Understanding how clients and prospective clients perceive value.
- Developing accurate and robust price segmentation models.
- Understanding segment-level price elasticity or price sensitivity.
To hijack a well-known concept, 'value, like beauty, is in the eye of the beholder'. That means that what one client values and will pay for, another sees as unnecessary or worthless. Failure to grasp each clients' concept of value on each matter means that your ability to accurately ascertain the clients maximum Willingness To Pay (WTP) is seriously compromised.
One of the greatest failings of our historical approach to pricing is to assume that a one-size-fits-all approach will elicit the best results. Clients wants and needs are not homogenous so why would we think that anything other than a customised, bespoke pricing solution that offers clients pricing choices will produce the best outcomes for the client and the firm? (See Validatum® Price Customisation Clinics).
Price segmentation is simply charging different prices to different people for the same or similar product or service. You see examples every time you go shopping: student prices at movie theatres, senior prices for coffee at McDonald's, people who use coupons and many more. The industry that probably does price segmentation better than any other is airlines. It seems that no two people on a plane paid the same price.
Price segmentation is ubiquitous, whether in retail, restaurant and hospitality, software or Amazon parcel delivery. It is however little understood in the professional services space and yet it is one of the most powerful tools available to pricing professionals.
Understand price elasticity
Price elasticity is a measure of the relationship between a change in the quantity demanded of a particular service and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the service is said to be price elastic (or responsive to price changes). Conversely, the price of a service is inelastic if a large change in price is accompanied by only a small change in quantity demanded.
Most firms do not have an understanding of the comparative price elasticity of either their clients or work-type segments. This lack of insight further exacerbates the inability to achieve price customisation and therefore a clear understanding of the clients Willingness To Pay.
From our perspective, these are three of the primary sources of pricing power, particularly in a B2B environment. And by excelling in just these three areas, a firm would be able to:
- Develop offerings that are inherently more appealing and more profitable.
- Meet the needs of different client groups that exist in the marketplace.
- Win the business they want to win, at maximum revenue and margin levels.