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Three Reoccurring Principles for Pricing Strategies
Regardless of the state of the economy during a business cycle, pricing strategy is a challenge that companies struggle to perfect. During recessions, business-to-business executives seek ways in which to cut costs or lower prices without hurting the company’s long-term prosperity. When upswings finally come, companies balance difficult trade-offs between price premiums and share gain.
In periods of slow growth (as the U.S. economy is now experiencing), businesses are seeking new ways to grow top line revenue—and increasing prices is an attractive option if executed correctly. Through all of these economic stages and across B2B industries, Blue Canyon has identified three reoccurring principles for pricing strategies that, if heeded, will help B2B companies create robust pricing that will guide them through difficult decisions. These principles are:
- Always explore levers besides lowering price
- Embrace segmentation as a key driver of a successful pricing strategy
- Make educated pricing trade-offs by understanding the context of the purchase decision
Always Explore Levers Besides Lowering Price
Typically, there are four primary drivers of price conflicts where suppliers often have a knee-jerk reaction to lower price. In these situations you must understand the underlying reasons for your customer’s or channel partner’s dissatisfaction. By understanding these root causes, and through applying active channel management, you can address these conundrums without necessarily lowering price. The following summary can help you think about the four different drivers of price conflicts and the levers available to you:
|New Entrants||Promote your services, nurture customer relationships, retain or expand any product differentiation, and be attentive|
|Alternate Channels||Promote your points of differentiation, particularly those that are expensive or time-consuming to duplicate|
|Consolidation||Promote your services, nurture your customer relationships, and be attentive; Look for buy or sell opportunities|
|Converging or Integrating Roles||Stay abreast of changes and keep your customers’ problems in your sights|
Download Blue Canyon’s White Paper: Understanding and Overcoming Pricing Conundrums
Embrace Segmentation as a Key Driver of a Successful Pricing Strategy
No matter what kind of market you operate in, segmentation will be key to your pricing strategy for one of two reasons:
- It will allow for some level of price discrimination
- If you cannot price discriminate, segmentation will help you price for your target segments
To maximize profits in either scenario, suppliers must understand what different customers across different markets in different settings are willing to pay. A one-size-fits-all pricing model could result in suboptimal pricing. When segmenting to support pricing decisions, a supplier should consider:
- Which segments have higher or lower price elasticity
- Whether it’s optimal to price for the price-sensitive customers or to skim the high end of the market for premium prices
- If price transparency in some, or all segments, limits the ability to price differently
If you’re having a difficult time addressing these considerations, you may need to ask if it is time to rethink segmentation. If your segmentation isn’t effective and isn’t based on customer needs/purchase behaviors – or it doesn’t address multiple stakeholders – the answer is often yes.
Download Blue Canyon’s White Paper: Is it Time to Rethink Segmentation?
Make Educated Pricing Trade-Offs by Understanding the Context of the Purchase Decision
When crafting a pricing strategy, and accompanying a segmentation scheme, you are ultimately trying to distinguish the believers from the cynics (i.e., which customers believe in your solution and are willing to pay for it versus which customers don’t value anything besides price). To do so, it is important to understand the context of the pricing decision by assessing the customer, segment, or specific opportunity along two dimensions (see Figure 1):
- Pricing Potential – Determine how important you are to your customer(s)
- Pricing Impact – Understand how important the customer(s) is/are to you
The higher the pricing potential, the more premium pricing you can introduce. The higher the pricing impact, the more you may want to use pricing (or other levers) in order to ensure the sale. To determine the pricing potential, assess the customer’s business by considering factors such as competitive differentiation, relationship advantage, and financial strength. To determine the pricing impact, assess from the perspective of your business and consider:
- Impact on revenue and profitability
- Size of customer/opportunity
- Customer growth potential
The resulting balance of these two dimensions helps inform what pricing level is appropriate for that customer or customer segment to maximize profitability and the ability to win in the marketplace.
Download Blue Canyon’s White Paper: Expensive Decisions: Getting Pricing Right
Remaining Stable in an Unstable Economy
These three guiding principles will help you create a robust pricing strategy that will see your company through the highs and lows of the market. When faced with pricing pressure, you will look for other levers to pull besides lowering price, which will help your prices remain relatively stable as the economy shifts. Accurately segmenting your market according to purchase behaviors and pricing will prepare you for how different segments will react in different market conditions and give you the structure to react appropriately. By understanding the context of each pricing decision through evaluation of your customers, your business and the market environment will allow your pricing strategy to be flexible and help you continuously identify the “believers” in the crowd.
 Atlee Valentine Pope & Bruce Karr, Understanding and Overcoming Pricing Conundrums, Blue Canyon Partners, Inc. ©2015
 Kevin Sarb & Atlee Valentine Pope, How Much Will Your Customers Pay? And How Can You Capture This Value?, Blue Canyon Partners, Inc. ©2015
 Axel Leichum, Is it Time to Rethink Segmentation?, Blue Canyon Partners, Inc. ©2015
 Michael Daniel, Axel Leichum, & Atlee Valentine Pope, Expensive Decisions: Getting Pricing Right, Blue Canyon Partners, Inc. ©2014