by Per Ohstrom, CMO with Chief Outsiders
In March, a massive ship named the Ever Given ran aground in Egypt’s Suez Canal, which had knock-on effects around the world. Since then, and as we have headed out of the pandemic, other serious supply chain issues have surfaced. 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 we head into the holiday season. Nowadays, there is more concern than ever about something bad happening to the economy. All these issues can squeeze company profits. What should B2B companies do about it?
When profitability suffers, the first order of business is to lower company costs. For example, Lean Process Improvement 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 alternate raw material suppliers, contractors, or temps that are capable of bringing instant skills to your organization.
Cost reductions aside, to maintain profitability in these strange times, companies will also need to take pricing action. Different approaches are available for raising prices, but increases must be carefully implemented, with an eye to the competition. It is also important to look out for possible disruptors lurking in the shadows.
Strategy.
Any pricing initiative should start with an understanding of company growth engines and the important sources of volume. Don’t jeopardize those. It is also necessary to have good tabs on market participants, since competition and differential value sets the boundaries for pricing. Improving the differential value of offerings makes it easier for customers to pay more!
At the core of business strategy is segmentation, based on a solid understanding of customers performance needs, purchasing process and criteria. Do they want to buy direct or through a distributor, and where are there price sensitivities? Less profitable SKUs can be sold through alternate channels like ebusiness.
Be more aggressive with price in segments where there are no clear substitutes. Make sure value propositions are fine tuned for each target segment. Do the company offerings help customers reduce cost (e.g. faster adhering glue for speedy processing), or increase revenue (maybe enabling a green claim with water based auto paint). There is nothing wrong with charging different prices in different markets.
1. Re-frame the Price.
Products, services and parts can be classified by how unique they are. Custom products and parts can be marked up, while items like nuts, bolts and hose need to be lower priced to avoid substitution. Having Good, Better and Best products for entry level, target level and show off products allows pricing flexibility. Lower price offerings with higher margins, like private label items or insourced entry level products also have their place in the product range.
Items that are usually bought together can be bundled into an assembly or dispersion that makes subsequent processing faster. Parts used for routine maintenance, including consumables, lend themselves well to bundling. Imagine the convenience of a kit for gasket replacement, saving time and trips to the hardware store. Bundles can be priced slightly lower than the sum of the parts, or higher if there are efficiency gains.
If an offering is late in its life-cycle and sales are declining, customers can be migrated to SKUs with better margins. Exploit price elasticity when switching costs are high, or there is a great degree of customization.
2. Re-define the Product.
Product definition can be changed by adding a valuable service component like installation or vendor managed inventory to a physical product. Delivery or maintenance contracts can be branded and productized for better price differentiation. Changes in product packaging are relatively easy -adding color coding on boxes, or offering tote quantities of liquids both offer opportunities for price adjustments. Price structure can be modified with a different unit of measure, and charging by activity like hours flown, gallons pumped or number of students trained. Industrial customers often prefer renting over buying, whereas 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 variations of fixed and variable price. Certain customers will prefer a monthly fixed fee with a variable usage charge, over a higher fixed fee with a capped variable.
3. Communicate Value.
Many companies are shy about communicating quality and value. Be explicit about a product’s price position in the market. Don’t let prospects guess -if you have a unique or premium product, say so to justify a higher price. Research customer operations in detail, and determine what end benefit your product contributes. Then value- price accordingly, while being very collaborative around innovation and product development. Stimulate new demand with an offering and pricing configurator tool on the website.
4. Active Use of Terms.
Change the price context and mark up freight and rush orders, and have a surcharge for small orders. New clients can be hooked with a basic service, then offered self-serve upsell for more functionality. Changing cut-offs and target levels for volume discounts and rebates helps improve margins. Enforce surcharge rules in contracts for fuel, shipping costs or raw material price pass-throughs. Optimize price for high use/ high utility SKUs. If price increases are risky, there might still be a share of wallet to be had.
If there is a great need to differentiate pricing between customers, payment terms can be adjusted.
Implementation.
Before implementing price increases, charter a cross-functional pricing team including Sales, Marketing, Finance, and Operations. When deciding on pricing adjustments, reexamine prices line by line. SKUs that have not had increases recently may be priced too low, hence there will be less resistance to increases. Always make sure to provide product and service options to retain price sensitive customers. Cheaper, stripped-down “Good” versions work well for retaining customers, as do lower priced offerings made available in limited quantities only.
When communicating price increases, provide an explanation for your decision. Don’t shy away from mentioning how long it’s been since prices were previously adjusted, or highlighting how much the customer has raised their selling prices. It is also a good idea to signal pending price increases directly to important customers. Announcing upcoming price moves through trade press is not collusion, and gives competitors a chance to follow suit, increasing industry profitability across the board.
Bottom Line.
It is difficult to make a conventional price increase stick. Effective pricing starts with segmentation of the market, based on customer needs. With pain points well understood, an offering meeting segment needs can be designed and priced according to the value it provides. Adding service components to products can add differentiation, as can innovative pricing models like subscriptions or activity-based pricing. No matter how a company arrives at a price, it is important to communicate the value of each product and service.
Per Ohstrom is CMO with Chief Outsiders, the nation’s leading fractional CMO firm focused on mid-size company growth. He works with manufacturing, rental, distribution and other B2B companies to find practical and differentiated solutions for growth.
