B2B Pricing in a Changed Economic Environment
Price Volatility – Supply Shocks and Demand Shocks
Many demand patterns have shifted since the upheaval in the global economy that began in March of 2020. As a result, there have been many curious pricing changes. In our daily lives, I am sure all of us have noticed significant price shifts in staples of our consumption – gasoline and groceries. In many B2B markets that have faced demand shocks, supply shocks, or both, significant price shifts have been observed. For example:
- Building products prices, especially for residential, have seen significant swings. Lumber prices are ~160% over the past year. This has been driven mostly by very strong demand in new housing builds as people migrate to new locations and move out of cities, as well as supply backlogs due to sawmill shutdowns in the spring.
- Food producer prices have seen ups and downs. The food price index is up ~26% over the past year, driven both by supply shocks from shutdowns of production facilities and from significant upward demand for food staples consumed in the home.
- Travel and leisure prices have dropped significantly. For example, average domestic airfare prices have dropped over 30% since the end of 2019. This is of course driven by the significant decline in business travel demand along with limited leisure travel demand.
As we hopefully move past the intermittent supply shocks that have occurred in various industries, shifts in demand are likely more persistent as changes in behaviors become ingrained in society. Understanding these persistent demand shifts and how they affect the demand for your offerings will be critical to ensure that your company is not leaving money on the table in the changed economic environment going forward.
Two Key Questions to Address
There are 2 fundamental questions to answer as you update your pricing strategy in a changed environment, which we have described in past writings:
- Customer’s Need for Offering Category –How has demand and willingness to pay changed in the overall market(s) in which your offering participates?
- Differentiation of Your Offering – How much more or less differentiated is your offering compared to competitive offerings under these new dynamics?
The framework below in Figure 1 illustrates how these questions can be applied in 2 dimensions:
Using this framework, as your offering’s position shifts either up, to the right, or both, there will be increasing willingness to pay for it. This reveals the opportunity for a profitable price increase without significant risk of losing volume and overall profit.
To consider how this can be applied to a B2B situation using the example of a remote automotive diagnostics solution and its pricing effects across the customer chain in a changed economic environment.
Increasing Need for Offering Category – Remote Automotive Diagnostics Solution Creator/Designer
A company providing a remote automotive diagnostics solution to repair shops and dealers may find that there has been a significant shift in the need for such a solution. Remote diagnostics solutions connect to a vehicle’s onboard diagnostics system (OBD) and allow mechanics and repair shops to perform diagnostics before a vehicle is brought in, saving time and limiting in-person contact. As people demand more contactless service and avoid contact with others, dealers and repair shops could differentiate themselves by offering such a solution. Thereby, the customer’s need for the offering category has meaningfully increased in the marketplace. The remote automotive diagnostics solution may be no more differentiated from its competitors than it was before. It has no new features or capabilities relative to competitor solutions, but the overall category is now in greater demand. There is now a greater willingness to pay for it.
Increasing Differentiation of Your Offering – Automotive Dealer/Mechanic Repair & Maintenance
The next step in the customer chain, the dealer or mechanic, may find that the need for automobile maintenance and repair will return to normal as vaccines are administered, herd immunity is reached, and economic restrictions are lifted, leading to a resumption in vehicle miles driven. The need for their solution category, automobile maintenance and repair, may return to the same demand levels as before. However, if they have more aggressively adopted remote diagnostic technologies, solutions, and approaches, they will have a more differentiated offering/solution from other competitors. While in the long-term, the need for their offering category returns to “normal”, their offering is now more differentiated, indicating a greater willingness for the market to pay for it.
Figure 2 summarizes the situation across the customer chain:
We can then put this all together and assess changes in willingness to pay across our framework. See Figure 3 below:
As we can see in Figure 3, the Remote Automotive Diagnostics Solution shifts to the right in the 2×2, since the need for the offering category increases, while differentiation remains the same. The Dealer/Mechanic offering with remote diagnostics shifts upward as the differentiation of the offering has increased, while long-term need for the offering category has not. Both examples find an increase in willingness to pay for their solution .
By evaluating the 2 key questions (customer’s need for an offering category and differentiation of your offering), you will be able to find situations where willingness to pay for your offering has changed, either positively or negatively. To evaluate these 2 key questions, a deeper assessment of demand changes underway in this new economic environment will be required. For example, will miles driven increase in the future and approach closer to what used to be normal, further increasing demand for remote auto diagnostics solutions as dealers and end customers have become more accustomed to using them? Can we expect wide-ranging adoption of remote automotive diagnostics solutions among Dealers and Mechanics?
 Sarb, Kevin and Atlee Valentine Pope, How Much Will Your Customers Pay? And How Can You Capture This Value?