In March, a huge ship named Ever Given ran aground in the Suez Canal in Egypt, with repercussions around the world. Since then, and as we emerged from the pandemic, other serious supply chain issues have arisen. More recently, the Great Resignation has made it harder than ever to find top talent, and a recent study found that 88% of Americans are worried about inflation as the holiday season approaches. Nowadays, there is more fear than ever that something bad is happening to the economy. All of these problems can reduce the profits of the business. What should B2B companies do about this?
mohamed_hassan / Pixabay – Valuewalk
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When profitability suffers, the priority is to reduce the costs of the business. For example, improving lean processes can have lasting positive effects on the bottom line. Businesses can and should also consider outsourcing functions like IT, payroll, and even manufacturing. There may be other raw material suppliers, subcontractors or contractors who can bring instant skills to your organization.
Cost cuts aside, to maintain profitability in these strange times, companies will also need to take pricing action. Different approaches are available to increase prices, but increases must be carefully implemented, taking into account the competition. It’s also important to watch out for potential disruptors lurking in the shadows.
Any pricing initiative must begin with an understanding of the business growth drivers and important sources of volume. Don’t put them in danger. It is also necessary to monitor market players well, as competition and differential value set the limits on pricing. Improving the differential value of offers makes it easier for customers to pay!
At the heart of business strategy is segmentation, based on a solid understanding of customer performance needs, the buying process and criteria. Do they want to buy directly or through a distributor, and where are there price sensitivities? Less profitable SKUs can be sold through alternative channels like e-commerce.
Be more aggressive with pricing in segments where there are no clear substitutes. Make sure the value propositions are refined for each target segment. Do the company’s offerings help customers reduce costs (e.g. faster tack glue for quick processing) or increase revenue (perhaps by enabling a green claim with an automotive paint based on water). There is nothing wrong with charging different prices in different markets.
Crop the price
Products, services and parts can be classified according to their uniqueness. Custom products and parts can be branded, while items such as nuts, bolts, and pipes need to be cheaper to avoid substitution. Having Good, Best, and Best products for entry level, target level, and demo products allows for pricing flexibility. Lower-priced offerings with higher margins, such as private label items or outsourced entry-level products, also have their place in the product line.
Items that are typically purchased together can be grouped together into an assembly or scatter which speeds up further processing. Parts used for routine maintenance, including consumables, lend themselves well to grouping. Imagine the convenience of a gasket replacement kit, saving time and trips to the hardware store. The price of the lots may be slightly less than the sum of the parts, or more if there are efficiencies.
If an offer is late in its lifecycle and sales are declining, customers can be migrated to SKUs with better margins. Take advantage of price elasticity when switching costs are high or there is a high degree of customization.
Redefining the product
The product definition can be changed by adding a valuable service component such as facility or vendor managed inventory to a physical product. Delivery or maintenance contracts can be marked and produced for better price differentiation. Changes in product packaging are relatively easy – adding color codes to boxes or offering quantities of liquids in bags both offer possibilities for price adjustments. The pricing structure can be changed with a different unit of measure and billing by activity such as hours flown, gallons pumped, or number of students trained. Industrial customers often prefer to rent to buy, while government customers may have easier access to capital budgets.
Subscription models are popular in software and can also be used for consumables or rental equipment. Automatic renewals make the relationship stickier. The same product can be offered with different fixed and variable price variants. Some customers will prefer a monthly plan with variable usage charges over a higher plan with a capped variable.
Communicate the value
Many companies are reluctant to communicate about quality and value. Be explicit about the price position of a product in the market. Don’t let prospects guess – if you have a unique or premium product, say so to justify a higher price tag. Investigate customer operations in detail and determine what end benefit your product contributes to. Then evaluate the price accordingly, while still being very collaborative around innovation and product development. Stimulate new demand with an offer and price configurator on the website.
Active use of terms
Change the pricing context and mark up freight and rush orders, and apply surcharge for small orders. New customers may be addicted to a basic service and then offer a self-service upsell for more features. Changing the thresholds and target levels for volume discounts and discounts helps improve margins. Enforce surtax rules in contracts for fuel, shipping charges or impact on commodity prices. Optimize the price for high usage / high utility SKUs. If the price increases are risky, there might still be some part of the portfolio to be had.
If there is a great need to differentiate prices between customers, the payment terms can be adjusted.
Before implementing price increases, charter a cross-functional pricing team that includes sales, marketing, finance, and operations. When deciding on price adjustments, review the prices line by line. SKUs that haven’t had increases recently may be priced too low, so there will be less resistance to increases. Always be sure to provide product and service options to retain price-sensitive customers. The cheaper, streamlined “good” versions work well for retaining customers, as do the low-priced offers available in limited quantities only.
When communicating price increases, explain your decision. Please feel free to mention how long ago the prices have been adjusted, or to point out how much the customer has increased their selling prices. It’s also a good idea to report pending price increases directly to important customers. The announcement of upcoming price movements in the trade press is not collusion and gives competitors a chance to follow suit, thus increasing the profitability of the industry at all levels.
It is difficult to hold a conventional price increase. Effective pricing begins with market segmentation, based on customer needs. Once the issues are understood, an offer that meets the needs of a segment can be designed and priced according to the value it brings. Adding service components to products can add differentiation, as can innovative pricing models like subscriptions or activity-based pricing. No matter how a business comes up with a price, it is important to communicate the value of each product and service.
About Per Ohstrom
Per Ohstrom is Chief Marketing Officer of Chief Outsiders, the nation’s fastest growing “executive as a service” company.