Do you want to unlock the four steps to improving profitability in competitive B2B markets?

Over the last two years, macroeconomic pressures have left many B2B companies feeling there is little room to manoeuvre for increasing profitability. Within already highly competitive markets, margins have been fighting a losing battle against persistently high inflation, rising interest rates, and supply chains affected by geopolitical uncertainty.

Nevertheless, there are steps you can take to defend, even in complex value chains or multinational markets. The key is to focus on what you can control, which means addressing pricing at an organisational level by creating a holistic function that benefits from key stakeholder buy-in across the board.

Throughout our work with B2B clients and markets, we have observed three common themes that are emerging as key pricing challenges:

1. Product implied value and list price misalignment.

Product List Prices in B2B companies often bear little resemblance to the product’s value and price setting is not underpinned by robust analytics. This lack of value-based classification puts pressure on profitability, which is then eroded further by sales teams who are often incentivised on volume.

2. Unsystematic customer discounting.

Discounts aren’t correlated to customer revenue, willingness to pay, or differentiated based on key customer types or segments with varying pricing potential, and there is lack of formalised direction from senior leadership on how to approach discounting, hence more value is lost.

3. Lack of pricing governance.

Absence of formal governance and monitoring processes around pricing, which means that these issues are rarely addressed in a cohesive and systematic way if discussed at all. This leads to a lack of consistency in following best practices, with price architectures across territories as sporadic and uncoordinated as the discounting.

Together, these challenges reflect a persistent level of value leakage that has little to do with external factors yet can have a seriously detrimental impact on your margins. So, let’s examine how you can tackle them.

A four-layer pricing process for improved profitability

To address the key challenges mentioned above, companies should take control of the pricing function. Taking control means implementing an end-to-end pricing strategy that allows you to set the optimal list price for your products, differentiate net price paid by customers more effectively and guide your sales team’s negotiations, while enabling streamlined proactive decision-making on pricing through fact-based monitoring.

This four-pronged approach starts with setting list prices that differ based on product characteristics, customers’ knowledge of market prices and their subsequent willingness to pay:

1. List Price Setting: Defend margins while remaining competitive according to product characteristics.

Your product inventory can be split into three separate classes – each with its own approach to pricing:

• Key value items (KVIs): These products serve as an entry point for customers, who are very likely to be aware of competitor prices. Because of the high level of sensitivity, pricing needs to be market-led. These products may not drive a huge amount of margin, but they are nevertheless essential for bringing customers through your door and securing repeatable business.
• Fast-movers: These products generate the majority of your revenue. However, rather than being market-led, the prices should be determined by what your customers’ perceive as value. Find the characteristic or dimension of your product that correlates with what your customers prize the most. Any increase in that characteristic should be reflected by an incremental growth in list price.
• Tail products: Otherwise known as slow-movers or shadow products, these items are not well-known, often more configured, and specifically relevant to individual customers. Because they are not bought frequently, they contribute to higher inventory cost and customers are usually unaware of competitors’ pricing. As such, these products should demonstrate higher margin with little to no discounting available.

Once you have classified your products, examine how each category currently contributes to your margins. You may be surprised to find a flat or declining margin structure as you move from KVIs to tail products which is far from optimal given the characteristics of each class stated above.

Optimising prices according to product class features, maximises your profitability while defining your brand positioning. This ensures that each product class is adjusted according to the customer’s willingness to pay, market intelligence and product’s own inherent characteristics.

Where your company operates across multiple territories, these prices serve as a master list which can be adjusted according to local factors affecting prices such as foreign exchange rates and/ or regional dynamics to create local list prices.

2. Commercial Segments: Set discount guidelines via commercial segmentation.

Just as you’re likely to find significant variations in product price versus perceived customer value, there is often a real lack of consistency in discounting levels across the customer base. Once you have effectively categorised your products to maximise your margins, it’s time to do the same for your clients.

A range of factors need to be considered when clustering your customers together, such as their annual sales with your business, customer’s turnover, verticals, value chain position, channel, penetration rate, tenure, payment behaviour, industry and if the customer is new or existing to name a few.

The output of such an exercise is a list of defined commercial segments with varying pricing potential, that support you in setting maximum and minimum discounts thresholds for each one according to their unique needs, purchase drivers and willingness to pay.

These discount corridors provide clear guidelines for your sales teams, ensuring that negotiations are conducted more systematically to protect profitability while remaining competitive in the market.

3. Sales Decision-Making Support: Sales net price decision support and guidelines on best practices for commercial negotiations.

With most B2B sales teams incentivised by volume of orders, it can sometimes be difficult to shift teams towards the mindset of protecting or even growing margin. One of the most effective ways of achieving this is through simple pricing tools that support the price negotiation process by generating recommended pricing levels within the discount thresholds and list price guidelines from steps 1 and 2 based on a set of parameters for the specific deal context.

The tools can also require any deviation from the recommended pricing ranges to be escalated and approved by senior management for large commercial deals.

This should be reinforced by the creation of a written sales policy that includes common tactics, core questions to be asked in a sales meeting, and a guide to objection handling, ensuring that margins are consistently and robustly defended throughout the process.

4. Pricing Governance & Monitoring: A periodic pricing cadence to evaluate sales performance and drive decision-making and corrective pricing action.

As with all things in business what gets measured, gets done. When it comes to pricing, we recommend establishing a monthly/quarterly pricing committee for senior management and heads of sales teams to come together, keep momentum on pricing and review performance across a set of pricing key performance indicators to aid decision-making and corrective action.

This is a regular opportunity to assess and discuss any changes in market conditions, sales performance and margins that require adjustments to pricing policies. It also provides members with the chance to review price performance and identify compliance with the sales guidelines established in steps 1, 2 and 3.

For larger organisations, the committee also provides the opportunity to share best practices across business units, address additional data required, discuss new product proposition, activities, and costs in a structured and constructive way that supports driving business performance.

Create a clear pricing vision for your organisation

The volatility of B2B markets is unlikely to subside in the short or medium term. To take control of your profitability, you need an end-to-end pricing function that establishes a clear vision for pricing throughout your organisation.

By implementing even, a part of the strategy outlined here, a margin uplift of 2-5% can be achieved. Implement it end-to-end and you will have a robust mechanism for preventing value leakage that can withstand even the most competitive market conditions.

To learn how we can help, contact one of our consultants today.