Pricing impacts everything. Pricing strategy is one of the few operational areas that have a direct and meaningful impact on profits.
With a 1% uptick in prices, Harvard Business Review and other studies have shown that companies can improve net margins 11%. So why do so many businesses ignore or overlook pricing when trying to improve profitability?
In B2B sales environments — in the automotive, construction and food service sectors, for example — pricing decisions, in the last mile, are made quickly and usually without strategic considerations.
Staff with the authority to adjust prices are more inclined to retain customers and hit sales targets than maintain profitability. More often than not, pricing decisions made in this last mile are soft, resulting in profit erosion.
Why do businesses make pricing mistakes?
In a Bain & Company global survey of 1,700 B2B businesses, interviewing CEOs, CFOs, CMOs, and Sales VPs, 85% of respondents “believe their pricing decisions could improve.”
Business leaders know there is significant margin upside on the line, and there are numerous tools on the market apparently designed to solve this problem. And yet, soft, weak, and strategically misaligned pricing continues, eroding profit margins and brand value, in the eyes of customers.
Despite advancements in pricing technology, a number of factors are still affecting many companies across dozens of sectors, including:
- A mismatch between sales incentives and pricing. If you’ve got a sales team incentivized to hit targets based on overall revenue, then the more they sell, the more commission/bonuses they earn. Prices take a hit. Lower prices, more sales, more revenue, resulting in reduced profits.
- Competitor pressure. Constantly connecting your own prices to that of a nearby competitor will weaken profitability. It puts your strategy at the mercy of a competitor, reducing profitability.
- An over assumption of customers price sensitivities. Customers, even in B2B environments, are not as price sensitive as companies assume. Even when customers indicate they’re price sensitive are going to buy from a competitor, this isn’t always the case.
- One-size-fits-all doesn’t work. Too often, sales reps are not aware of product margins and don’t know whether they can adjust prices up as well as down. Margins are lost due to a lack of awareness, knowledge and training.
- Failure to understand customers perception of value. Ask yourself, why do customers buy from and stay with us? Is price the only reason? Or do we provide great customer service (CX), have the best range of stock, focus on quality? Loyal customers look beyond price when making purchasing decisions.
For these and numerous other reasons, there is often a disconnect between the results business leaders want — improved margins — and the prices customers are charged. In too many businesses, there is a misalignment between sales and pricing strategy.
When sales teams are praised for closing deals, then price is the one lever they can use to get them over the line. If they perceive price as the something preventing a deal from closing, it’s usually the first thing that gets lowered.
How to solve this pricing problem?
Hundreds of companies, from builders merchants to automotive parts suppliers, are struggling with the same challenges. And the result is the same, no matter what senior managers try to increase profits, margins remain tight and performance uncertain.
Pricing is the most effective lever business leaders can use to turn this around.
Instead of letting competitors or suppliers dictate prices (cost-plus), make them customer-based.
Change the way sales reps adjust prices. Use a customer-based approach to pricing to maximize returns and increase margins.
Different customers perceive price and value in ways that are unique to them. Some are more sensitive than others. Whereas other customers make decisions based on layers of value judgements. Sales reps that assume every customer is price sensitive leaves money on the table.
Customer-based pricing solves this problem.
Instead of assuming, an AI-powered pricing tool, such as Bubo.AI can more accurately calculate what customers are really willing to pay than a sales rep eager to hit this months number.
As we have seen, with Bubo.AI in action, clients can increase profits 19% in 9 weeks.
Another client experienced a 45% net margin improvement, with a few months of Bubo.AI being implemented. AI-powered, customer-based pricing is the most effective way for companies to recapture value in that last mile of pricing, increasing margins and improving profits.
According to the Bain & Company global survey, a pricing tool is only part of the solution. Front-line teams benefit from training and more transparency to connect incentive structures with pricing, to encourage them to push for higher-margin sales.
So far, pricing tools have only been adopted by 26% of companies surveyed, which means too many are still watching margins erode every month. Isn’t it time you stopped leaving pricing to gut instinct, competitors and assumed sensitivities?