4 pricing strategies used by successful B2B companies
Now that we've discussed how B2B pricing strategies are different from those of B2C, let's discuss the strategies themselves. There are a number of strategies that businesses may employ to price their products when selling to other businesses, but the four listed below are the most common choices. Let's go over each of them and discuss the reasons a business might want to choose, or avoid, a particular pricing strategy.
1. Cost-plus pricing
Also known as markup pricing, cost-plus pricing is one of the more simple pricing strategies out there. With this strategy, the cost to produce a good or service is calculated. This means adding up the materials, labor, and overhead required to produce one unit of the item. After that, a fixed markup percentage is added on top. For example, an item that costs $10 to make and had a 50% markup, would sell for $15. Because this is such a simple pricing model, factors such as competitor pricing are not considered when calculating it.
- Cost-plus pricing is simple to calculate and makes it easy to be transparent with your customers about why a product costs what it does.
- Because the markup is consistent, you can expect a consistent rate of return from sales of the item.
- In the B2B world, where negotiations are common, it is easy to offer lower markup to businesses who wish to negotiate better prices.
- For businesses such as SaaS, the cost to produce a product might not be very high, making cost-plus pricing much less attractive.
- Automatically raising the prices by a certain amount can also reduce the impulse to reduce manufacturing costs, since any price increase and costs are offset by an increase in markup.
- Because competitors are not considered, it is easy to overprice your goods and services with this pricing model.
2. Value-based pricing
With cost-plus pricing, it is easy to price your product too high, but also easy to leave money on the table. Value-based pricing seeks to avoid those problems by charging based on what the value to the customer is. More directly, value-based pricing charges what the business thinks the customers would be willing to pay for a product. If the calculation is correct, this makes for a very efficient pricing strategy.
- It can be easier to penetrate a new market and compete with other businesses when you choose value-based pricing over cost-plus pricing. By charging what customers are willing to pay, you avoid both turning potential customers away and selling yourself short.
- Because it is possible to increase the perceived value of a product, you can increase the amount of profit you'll be able to make off of each item by taking steps to improve the perception of your brand.
- Calculating the perfect price for a value-based strategy is difficult and can take time to gather your customer intel. No magic button tells exactly what the majority of your customers are willing to pay. This is especially true when you are just starting and don't have the benefit of past B2B or B2C sales data to draw from.
- While you do have some control over the perception of value, the market can also be very fickle. In some businesses, you may find that your pricing isn't very stable as you constantly need to adjust to changing market forces.