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A Better Way to Price B2B Offerings

A Better Way to Price B2B Offerings

Vikas Mittal

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“Our offering is commoditized. We must lower price to stay competitive.” The inability to raise prices despite an improved product offering is a common refrain among many senior executives at B2B companies. Many B2B executives reduce price to dollars and cents paid by the customer, in lieu of improving the core product or service offered. This is a mistake. A better way to price B2B offerings is to encompass the totality of the customer experience, which includes the billing process, pricing perceptions, long-term pricing arrangements, credit terms and value for price paid.

Since 2017, my colleagues and I have conducted a large-scale survey of more than 7,900 B2B customers. B2B managers in our survey have rated more than 600 companies, including many Fortune 500 firms such as Apple, Microsoft, Dow, Caterpillar, UPS and 3M. The survey participants are B2B customers at all levels, including managers, directors, vice presidents and CEOs. In this benchmark survey, respondents rate their satisfaction with eight areas of their overall experience: sales and bidding, communication, pricing and billing, product or service quality, project management, safety, ongoing service and support, and sustainability and social responsibility. We can statistically ascertain the importance that customers put on each of the eight areas, but also various sub-components of each area. The results provide important insights for B2B companies to improve their pricing strategies.


B2B Customers See Price as a Small Component of the Total Value Proposition

Among the eight areas evaluated by B2B customers, pricing and billing accounted for 9% of customer value, with ongoing service and support (34%), product or service quality (17%) and communication (15%) representing two-thirds of value. Yet many sales executives believe that price accounts for most customer value that they provide. Nothing could be further from reality: Although pricing may be important for the procurement department, it may not hold the same importance for other stakeholders in a client organization.

The latter stakeholders may value communication, ongoing service and support, and the quality of the offering. When asked about price, savvy salespeople start by enumerating the total value that their offering provides and then end with the price. Inexperienced salespeople start and end with price, extolling how their price is lower than specific competitors.

B2B Customers Prefer a Fair Price Over Lowest Price

Technological innovation in the B2B sector is typically geared toward increasing product quality and lowering price. Companies lower price to gain market share with the goal of rationalizing their product costs over a larger customer base.

Our study results refute the logic of this approach. Customers in our survey rated their satisfaction with getting a fair price as well as the lowest price. Surprisingly, getting a fair price is three times more important to respondents than getting the lowest price. We have found this same result in many B2B companies involving software, parts distribution, oil field services, engineering and construction, and mobile-office units.

Fair price means that you are not priced at the extreme (highest or lowest), the pricing structure is easy to understand and the price is closer to industry-sector average (slightly higher is OK). For example, the price for property-management services for single-family homes in a Houston suburb ranges from 3-10% with an average of 5%. By offering a flexible pricing structure in the 4-6% range, a management company was able to increase the count of properties under management from 80 to almost 150 within the span of a few months.

B2B Customers Want Pricing and Billing to Be Managed as a Process

At retail stores, customers choose a product, make a payment, get a receipt and walk out. The receipt serves as a clear reminder of the price paid and makes the bottom-line price relevant to customers. B2B transactions are different: While pricing is relevant during the bidding and procurement stage, the billing process becomes important during the project execution phase. Over time, the customer expects the billing and invoicing to accurately and clearly document what part of the contract has been delivered, how it was priced, account for any variance from the original contract and so on. The billing statement becomes an ongoing communication tool for aligning customer and supplier expectations. Our study participants rated the clarity of billing statements, accuracy in pricing and ease of understanding pricing as some of the most important factors driving their satisfaction.

In one example, a waste-management company serving retailers and chain restaurants was losing clients despite low price and timely service. In-depth interviews with recently defected clients revealed dissatisfaction with the billing and invoicing process, not pricing. The billing statement did not clearly indicate what each charge on the invoice represented. Customers could not store and search invoices online or get charges broken down for each location. There was no easy way for customers to dispute charges. Once the billing process was overhauled, customer retention increased in a matter of months.

Manage Pricing Holistically for Customers

In a B2B context, price is part of an initial negotiation and purchase. It also provides a forum for managing the give and take between customers and suppliers during consumption. By pricing holistically—going beyond the bottom-line price—suppliers can add value for customers through flexible credit terms, cash discounts, volume discounts, rent-to-own terms and leasing options. Rather than manufacturing and selling multimillion-dollar planes to its clients, Boeing started a leasing company to help smaller airlines afford its aircraft. A valve manufacturer in Texas expanded its market to small- and medium-sized clients by maintaining its original price but supplementing it with a three-month extended payment option to qualified customers.

Suppliers can also extract value by pricing holistically. Frequently, many suppliers price the core product or service but give away many services for free. At the very least, you should price the entire offering to include any additional services and components. These can include service calls, on-site repairs or add-on consulting. Later, even if you decide to provide some of these for free, the client can quantify the value. As the relationship evolves, some or all of the additional components could be provided for an agreed-upon price.

What Now?

Pricing B2B offerings is a complex endeavor that should go beyond determining the bottom-line price. Fixating on the final price is a mistake in B2B contexts because customers view pricing as a broader concept. To meet customer expectations, you must realize that pricing is one component of a larger value proposition. You should manage your price holistically rather than striving to be the lowest-price provider. Incorporating the billing and invoicing process over time can be even more important to customers than getting the lowest price.

The billing and invoicing process can become a valuable tool to manage client expectations, build stronger relationships and even upsell to customers. Accomplishing these pricing objectives requires close collaboration among the sales, finance, accounting, customer service and commercial departments of any B2B company.

Vikas Mittal is J. Hugh Liedtke Professor of Marketing, Rice University, USA.