B2B markets have become increasingly complex. In the past, setting accurate pricing for a few products could be accomplished using a spreadsheet. But what happens when you have thousands of SKUs, geographies, industries, and customer segments? Without the right price, you can expose your business to serious margin leakage.
The risk will increase with a need to build pricing for individual deals. In such a case, you cannot simply rely on predefined list prices but you have to reflect on your relationship with a customer and its specific situation to make your prices relevant. Of course, in individual pricing, the risk of margin leakage or error in calculation increases substantially.
What is price optimization?
Price optimization is the process of using internal and external data to set optimal price points for your products. It is a complex process, and it must resolve several obstacles to produce results that are truly valid for your business.
Getting the price optimization right
There are various optimal price points, and they differ depending on the business objectives. The optimal price point maximizing revenue is different from the price point maximizing profit. Therefore, it is important to identify your objective ahead of time.
One-size-fits-all pricing may be utilized in some industries but in B2B it usually leads to margin leakage which is due to differentiated willingness to pay (WTP) across your customers or customer segments. For example, WTP may differ in various countries where you sell. Long story short, your customers have differentiated perceptions of the value of your products and that’s why it must be reflected in your pricing.
WTP gives you the predicted product volumes to be sold at various price levels. The history of your sales is utilized for this purpose and WTP is calculated for each product/customer combination. It reflects all sales transaction-related data such as channel, point of sale, time of sale, and others.
To set optimal price points, you may need to involve additional data about your products and customers. For example, to get profit-maximizing price points you need to involve data related to the costs of your products.
You may also need to involve external data to make the resulting price points more precise. For example, you can reflect seasonal development of input costs, or costs-related indexes, and make your price points even more optimal across various seasons.
Of course, you probably have an extensive product portfolio with hundreds or thousands of SKUs, meaning the optimization process must be executed for each product in your portfolio. The good news is that even if you do not have sufficient data for all your products (e. g. sales history) you may utilize data and learnings related to similar products (e. g. in the same product category) to get optimal price points for the complete product portfolio.
To conclude, price optimization is a complex process, and trying to make it happen with basic tools is pretty much mission impossible.
Pricefx Optimization for Negotiation Guidance
Our Negotiation Guidance will provide you with optimal pricing on an individual customer level, making it easy for your sales team to use the right price for the right product.
It enables to set optimal prices while:
- Following your business objectives (profit maximization, volume maximization, …)
- Differentiating prices for various customers or customer segments
- Reflecting internal data and external circumstances
- Providing the prices with the optimal band (floor, target, stretch price) to support your negotiation efforts
- Presenting the recommended pricing for specific product/customer combinations in an understandable way, e. g. within quotation process
Overall, Negotiation Guidance will help you to improve the business KPIs you need to follow including margin, revenue, and the win-rate of your deals.
To find out more about our Negotiation Guidance functionality, visit www.pricefx.com/negotation-guidance
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