The Art of Pricing

Pricing has both elements of hard rational science and the soft intuitive and insightful. Here we consider not only pricing but the terms of payment offered. Do not divorce the two, value is a subtle play between your pricing and the terms of payment offered. We have discussed the pitfalls of doing business with large powerful buyers (or suppliers) such as multinationals or corporate entities, para-statals or even the government itself. They seem great until terms of payment are discussed.

Invest your time in good pricing

According to Bain, and with ample evidence to support this claim, one of the biggest areas of value leakage across all B2B businesses is pricing.

Strangely, while companies dedicate resources to continually reduce costs or sell greater volumes, they rarely invest to the same extent in their pricing capabilities. As a result, they leave money on the table and leave the door open for competitors that understand the power of effective pricing.

As the data shows, clever pricing can overshadow the collective efforts of managing direct and variable costs. It is also better to price your existing share of the market cleverly and properly rather than to chase growing your market share and not pricing your market share correctly. It seems so obvious, but sometimes when caught up in the day to day running of a business, the forest is obscured by the trees.

The Power of the Pricing Lever on your business.

Some Key Guidelines

These are guidelines, not rules or laws. There are always exceptions, so use your good judgment

Thoughts about B2B - Pricing

Thought	Rationale
Keep it simple!	Your licensing model should be transparent and easily understood, and easier to deal with than the competition
No surprises	Related to above, avoid offering a plethora of chargeable “extras”. Customers don’t like these kinds of surprises, and you erode goodwill but don’t do every “extra” for free either!
Stand Your ground	Do not bend over backwards and be too flexible. You have a great product it is fairly priced, don’t let them bully you and take advantage.
Be clear on what you offer	Make sure you differentiate between the different services you offer, don't let false assumptions breed bad blood.
Keep your end goal in mind	Scope and mission creep might have some fortuitous urban legends, mostly they end in misery
Think ahead	You know there might one day be an upgrade or a change in regulations, think ahead, make your customer's lives simpler.
Factor in Terms of payment	Taking 90 days to pay is very different to cash upfront. 90 is about a quarter of a year, and you don't want top be funding someone else's business for a quarter of the year now do you?

That said when following these guidelines do NOT make these mistakes

• Using a “set it and forget it” pricing strategy.
• Not experimenting with your pricing.
• Charging based on the wrong criteria.
• Providing too many (or too few) pricing options.
• Offering unnecessary discounts.

And don't adopt these beliefs without testing them properly, as they are often VERY wrong

1. Our products are commoditized, so we must accept prevailing prices in the market.
2. We can’t respond effectively against new, disruptive business models—much less figure out if we should be the disruptor—without jeopardizing our core business.
3. We can’t constrain negotiations without killing the ability of our salesforce to close deals.
4. We need to maintain legacy channel discounts to motivate our partners, even though those discounts create complexity and obscure our view of profitability.
5. It doesn’t matter if our list prices are competitive, because we hit the right price points through heavy, nonstandard discounts.

Understand what is important to your customers.

Quality and Reliability count for a lot to some, especially manufacturers.

An approach to pricing.

Micro-economics

Despite economists being discredited, they do have a few interesting points to consider, and can be useful. With all things that economists pontificate about, YOU MUST CHECK THEIR ASSUMPTIONS and INITIAL CONDITIONS!

The basics of pricing in Micro-Economics:

• a model wherein prices for a concerned good or service are determined within a given marke
• the prices are determined based on the balance of demand and supply in a market
• emand related curve in this particular model is set on the basis of consumers making an attempt to enhance their utility on the basis of their budget
• the supply related curve is determined by entities making an attempt to increase profits
• the price related model is designed on the basis of manufacturing a certain quantity of products/goods as per which the total revenue when deducted from total cost is maximum.
• i.e. this has limitations as far as B2B pricing is concerned

Terms of Payment

This looks all muddled but the general case must cater for the different combinations that various businesses have, some must pay for their inventory before receiving it, and others can pay later.

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What Are Buyer Personas and Why Are They Important?

Simply put, buyer personas are research-based representations of who your buyers are, including their buying behaviors and preferences. Creating them requires a deep analysis of the pain points and goals that drive the customer’s decision to purchase. The problem with developing your personas haphazardly is you can easily end up chasing the wrong customers, especially if your buyer persona definitions didn’t go beyond a few brainstorming sessions over danish (meaning you’re losing money). While it’s crucial to develop a great product, there’s more importance in ensuring you’re working to acquire high value buyers. Digging deeper, proper buyer personas have an enormous impact on your pricing strategy. If you know your highest value customers (positioning), what those customers want (packaging), and how much they’re willing to pay, then your most important metrics will fall into place. Value will be aligned and churn will be minimized, because why would someone churn if they’re paying an optimal price for exactly what they want? Even better, if your value metric is aligned to your personas, you’ll ensure that your revenue expands right along with your customer’s value.

Creating Your Buyer Personas

Now that we’ve covered why identifying your target customers and analyzing their buying behaviors is so crucial, let’s dive into the actual steps that define the road ahead.

1. Conceptualize Five to Ten Buyer Personas (even if you think you only have three)
2. Breakdown What Data You Need to Collect
   • Feature Value: What features and aspects of the product do customers care most about? What do they care least about?
   • Quantified Value Propositions: What value messaging drives them through the sales and marketing funnel?
   • Price Sensitivity and Willingness to Pay: How much are they willing to pay for you to solve their problem?
3. Collect the Data in a Methodical Manner
4. Segment and Analyze the Data
5. Target the High Value Customers

Table 1

Assets	ZAR amount in (000)	Equivalent Days	Liabilities	ZAR amount in (000)	Equivalent Days
Cash	..	...	....	..	....
Cash	..	...	....	..	....
Cash	..	...	....	..	....

a.........;

Easy pricing tactics for quick gains

Besides redesigning your pricing approach for the long term, you can also take advantage of tactical actions that don’t require new capabilities or customer insights:

1. Some customers may not be meeting contractual obligations for volume discounts. Reprice them for the actual volume they purchase.
2. Look for record-keeping or accounting errors that are causing you to undercharge.
3. If you charge a premium for value-added services, such as rush or special orders, there may be customers that use the services without consistently being charged. Make sure they pay for the services received.
4. Comb through SKUs to identify those that serve exactly the same function or meet the same need, yet are priced differently. Either increase the price of the cheaper SKU or discontinue it.
5. Identify customers that are not being served by the factory or distribution center with the most advantageous location from a profitability standpoint. Switch them to the best location.
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SaaS - Software as a Service

Unlike traditional software, which is conventionally sold as a perpetual license with an up-front cost (and an optional ongoing support fee), SaaS providers generally price applications using a subscription fee, most commonly a monthly fee or an annual fee.[15] Consequently, the initial setup cost for SaaS is typically lower than the equivalent enterprise software. SaaS vendors typically price their applications based on some usage parameters, such as the number of users using the application. However, because in a SaaS environment customers' data reside with the SaaS vendor, opportunities also exist to charge per transaction, event, or other unit of value, such as the number of processors required