A Guide on Product/ Service Pricing
The expression “You get what you pay for” actually has a deep and comprehensive meaning in the B2B marketing world. The following is a B2B marketer’s guide on what needs to be considered when pricing a product or service.
1- Understand the goals and go to market (GTM) strategy for the enterprise and /or the SBU (Strategic Business Unit). Example: is it “price skimming” – entering the market with a high price with the intent to capture a piece of the market and drive revenues, or penetration, initially pricing low to gain volume/market share or attack the competition?
2- What is the financial pricing philosophy? Is it cost plus (internal costs plus some factor to get to a selling price) or is the objective to have a certain margin (price minus cost). While I am not a fan of “cost plus” because it does not consider what I call the “surrounds” (buyers value, market advantages, competition, economic factors, etc.), it is critical to know ALL the costs that go into a product/service. There are the fixed product costs (material, labor), possession costs (storage, transportation) and user costs (installation, training), as well as the variable costs (marketing, distribution, corporate overhead, etc.)
3- What is the competitive situation? Do your competitors have the equivalent product and equivalent features? While this is important, I feel what is more important is a view of the competitor. What is the competitors’ goals and strategy, what is their GTM strategy, what do their financials look like? What market segments is the competitor focusing on? How will the competition react to your product introduction? All of this can have a major impact on pricing your product. An example would be, if the competitor has little margin, then pricing your product just below his could lead to capturing his market share. One last comment, whatever you do, do NOT get into a pricing war. These usually lead to both parties losing.
4- As I have repeatedly stated before, know the customer (enterprise in this case). Is there a demand in the segment(s), and if so, the value(s) might be different for each segment. Is there a major void with no current solution? What value-added benefits might the enterprise see from this product introduction? The benefit can be a unique or new feature, it can come from an operational feature such as reliability or quality; it can be from a financial factor like total cost, or even from a buyer department guideline, i.e., providing minimum risks or outstanding support. If an enterprise sees benefits and value (value is quality relative to some price), then your price can have a premium over the competition.
5- Does the product or service have a unique feature that the competition does not have or the market does not know about yet? If so you have a price advantage!
6- Is there a service that must be attached to the product? A strategy might be to lower the product price and recoup profits from the service. This is especially a good approach if you “control” the service and the enterprise sees value in the service.
7- What impact will this product introduction and its price have on your other products? Will this new product’s price and features replace another one or negatively impact your current revenue stream?
8- Channel considerations: who will sell the product? If it is your own sales force, then you may have some margin movement. If it is a reseller, they will usually want some form of discount from list, and thus the margin (therefore the price) has to be such that you and the reseller both make a profit.
9- Legal consideration: there are laws regarding price setting and discounting. For example the Robinson – Patman Act addresses unlawful price discrimination, requiring the seller to take into pricing into account when there will be multiple channels re-selling the product.
10- Lastly, once you have launched the product, monitor the situation in the field to see if adjustments need to be made.
Like any guide there are risks in general statements, but the recipe is usually the same, it is the ingredients that vary. So adjust each step relative to your product. Start with a well thought out strategy, decide on a pricing strategy that supports your enterprise’s goals and objectives. Know your competition, and know the channel(s) and their characteristics. Truly understand the benefits of the product/service and their related values for both the buying enterprise and their end users. Most importantly, understand that pricing is NOT a standalone task, but a multi dimensional – interrelated function.
In today’s tough economic times are your prices being forced down by cut-throat competition? Do you know how to escape from a price war?