Over the past few decades, business-to-business enterprises have done a marvelous job managing complexity in their physical operations by taking advantage of new technologies.
Yet for the same market, a massive new complexity remains unaddressed. B2B companies are grappling with decision complexity, often most evident at the intersection of sales and pricing.
There are three major trends responsible for the exponential growth in decision complexity within the B2B marketplace:
- The size of product catalogs and customer lists has grown rapidly, creating more questions for sales teams.
- Go-to-market methods are increasingly more diverse. Channels, promotions and price types continue to expand, along with ambiguity about how to price them.
- Volatility of costs, demand, prices and competitive behavior within the market add a layer of dynamic uncertainty to the landscape.
Today’s B2B markets are highly dynamic, and understanding the correct set of influences to apply is a constant moving target. The pricing influences active in B2B sales include product attributes, customer circumstances, order characteristics and market trends.
Identifying which influences actually make a difference in price, and quantifying how much they matter, is subtle and far beyond the capability of an unaided person. Typically, the most critical part of setting prices is overlooked: the combined impact on profit and loss from each individual price decision.
Faced with the overwhelming task of managing millions of complex decisions, many salespeople fall victim to myths. One common myth is that each customer shows the same price sensitivity for every product purchased. Experience in dozens of pricing implementations confirms just the opposite. An individual customer will have varying sensitivity to price for each specific product they buy and prices should reflect that.
When making millions of complex price decisions every year, salespeople introduce price errors without knowing it. The invoice price doesn’t match the price they could have charged to still win the business. This is not a shock. No human can possibly evaluate all the relevant influences, identify the truly important ones and balance them in just the right way to make the best possible decision every time.
The most common pricing error is underpricing due to the increased pressure to win business and meet quotas. While the impact of underpricing just one transaction may seem small, the cumulative impact across millions of transactions is very large. This impact is so significant that if they’re not stopped, profits gained elsewhere in the business can be completely wiped out by those errors. Ignoring pricing errors puts a huge drain on financial performance and puts your business at risk.
In a study cited in “The Price Advantage,” the top 1,200 global companies in aggregate proved that a 1% improvement in the average price received would yield nearly 11% improvement in gross profits. Many companies acknowledge that price is an incredibly powerful lever to improve profitability, but are still afraid to raise prices because they don’t have accurate predictions about the effects to P&L.
Advances in predictive algorithms can equip B2B companies to handle the millions of accurate pricing decisions required in the field. In order to manage decision complexity, businesses can apply their expertise of their current business objectives and price strategies to a price optimization engine that can calculate better-selling prices across the entire business.
By leveraging a price optimization engine, the forecasted margin and revenue impacts of prices are known before enacting a price change, enabling the creation and comparison of unlimited scenarios to arrive at the best overall price. This combination of “experts plus equations” ensures you’re setting scientifically accurate price points that are aligned to your business goals.
Author bio: For more than a quarter century, Barrett Thompson has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries and is a frequent speaker and author on achieving rapid and sustainable profitability improvements through the application of pricing science. Email him at firstname.lastname@example.org.
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