B2B Pricing Optimization - Another Way to Grow Your Business
image credit: Austin Distel on Unsplash
This post is the latest in our series on new technologies impacting industrial manufacturers and distributors. Earlier posts have included IIoT, 3D Printing, Generative Design, 5G, Artificial Intelligence, Digital Marketing with CAD, Blockchain, Digital Twins and this one is on Pricing Optimization. As we've seen with other new technologies, they are often combined to create solutions - in this case pricing optimization systems use machine learning (ML) from artificial intelligence and configure, price, quote (CPQ) systems including visualization and digital marketing with CAD.
What is Pricing Optimization?
Per Wikipedia, price optimization "is the use of mathematical analysis by a company to determine how customers will respond to different prices for its products and services through different channels. It is also used to determine the prices that the company determines will best meet its objectives such as maximizing operating profit." In the B2C world, we've all been increasingly subjected to it for decades, think of airfares you purchased, hotel rooms you've booked, or rental cars you've arranged. More recently have you noticed how the prices of goods on amazon.com varies? How about your insurance costs?
How is pricing optimization used in B2B rather than B2C?
In transitioning from B2C to B2B, pricing optimization has to adapt to 3 major differences:
- B2B generally involves negotiated pricing between customers and sales reps who have some allowed discretion and tradeoffs. Systems need to enable this behavior but guide salespeople to optimal pricing/profitability.
- B2B unit volumes are usually significantly lower, especially for industrial equipment and supplies. There is less available data to analyze so must be done rigorously.
- B2B products are often complex, have multiple options and components, can be configurable or completely made to measure. Once the complexity is mastered it can be an opportunity for pricing optimization.
How can pricing optimization help grow your B2B business?
You probably already have different pricing for different customers based on negotiated contracts, volumes or strategic partnerships, and those prices are displayed when those customers logon to your eCommerce/EDI system. Maybe you have different online catalogs as well as different pricing for different customers. We're not talking about breaking that but rather about using technology to increase average selling prices and particularly profitability. For example, B2B buyers are usually more sensitive to pricing on frequently rather than infrequently purchased items. Therefore it can be advisable to hold prices down on frequently purchased items or for specific components of a configured product where price comparisons are readily available but use demand-based pricing on other components or services.
What are the obstacles to using B2B pricing optimization?
Typically they fall into 4 categories:
- Process - pricing authority is often widely dispersed across a company - sales, marketing, finance, and operations probably collaborate in a consistent process despite having unaligned objectives. Changing that process to one that relies on agreed algorithms isn't easy!
- People - getting algorithms working is easy compared to getting all those people working collaboratively in a new or changed way. Training a sales team to use pricing optimization in its sales process takes time and can face resistance from employees with vested interest in the status quo or who thought they had lost business using the new approach.
- Data - The data used in price optimization can come from surveys, customer contracts, transaction records, list and realized prices, operating costs, inventories, promotional successes and failures, competitors' pricing, economic conditions, seasonal conditions, fixed and variable costs and more. Wherever it's from, it needs to be clean and complete. That's rarely the case because information is duplicated, incorrect or missing. Cleansing data and reliably gathering missing data is time-consuming and expensive.
- Technology - for the above reasons most B2B pricing optimization applications have had to mature and prove themselves with early adopters. Most still require significant implementation assistance, for example, to integrate components such as configure, price and quote (CPQ) systems. Vendor selection is therefore critical so let's talk about that next.
Who supplies B2B pricing optimization solutions?
Various consultants track this market in order to provide guidance and advice to their cients. For example, IDC's Worldwide B2B-Focused Price Optimization Applications 2018 Vendor Assessment ranks suppliers' as the graph below illustrates and Gartner's March 2019 Market Guide for B2B Price Optimization and Management Software describes price optimization and management software as an example of AI/ML that can deliver substantial business benefits. Their guide helps companies decide whether this technology is appropriate for their organization and covers these suppliers: Apttus, Brennus Analytics, Perfect Price, Periscope By McKinsey, Price Edge, Price f(x), PROS, SPOSEA, Vendavo, Vistaar Technologies, Vistex, and Zilliant.
1. If your company sells a large number of items consider a price optimization solution. IDC reports that, "most B2B-focused price optimization applications had a payback of less than 12 months, with some having paybacks of less than 3 months due to the product uncovering large opportunities from under-pricing." Gartner reports, "innovative offerings from both existing and new vendors have reduced the cost of deploying price optimization and management solutions by as much as 80%. Project risk has been reduced by the introduction of shorter contract terms and fixed-price or included implementation costs."
2. Pricing optimization applications can simplify pricing complexity in your company while enabling your eCommerce and salespeople to efficiently sell at optimal price. See various vendors case studies.
3. Anticipate that buyers (purchasing departments) will also employ ML technology to help them purchase more efficiently, for example, to automate price discovery, transparency and to manage RFPs. As transparency increases in B2B markets, using pricing optimization may be the best way to increase profitability.
As always, if you have comments or suggestions please make them below, click to ask us a question or call for a discussion. In the meantime we'll continue to keep you up-to-date on eCommerce and new technologies impacting industrial suppliers