B2B Dynamic Pricing – What is it and how can you implement it in your company using software.
All prices in Business-to-Business are dynamic. Some are just more dynamic than others.
Successful companies in B2B tend to adjust their prices based on factors such as production costs, competitor pricing, supply and demand. Dynamic pricing is a pricing strategy in which businesses adjust their prices for products or services based on current market situations.
Practitioners in B2B also refer to dynamic pricing as surge pricing, demand pricing, or time-based pricing. It relies on advanced B2B pricing analytics.
Dynamic pricing is a common practice in industries such as retail, travel, hospitality, electricity, entertainment and public transport. It is usually implemented using B2B pricing analytics software. Due to the surge of e-commerce, it is becoming more accepted in manufacturing and industrial distribution as well.
Dynamic pricing is not without controversy. Critics argue that dynamic pricing, particularly in the Business-to-Consumers field, might be a form of price gouging. Gouging happens when a seller spikes the prices of services, goods or commodities to an unreasonable or unfair amount.
What is B2B dynamic pricing and how to implement it in your company? Why dynamic pricing presents an opportunity as well as a challenge in B2B? How exactly can a pricing analytics software help you?
Let’s discuss these points in detail.
Why is dynamic pricing becoming more relevant in B2B?
Setting the price right has always had a more significant impact on profits than reducing sales costs or increasing volumes. Especially if one considers that the average margin of the most significant industrial distributors is as low as 1%, manufacturers, in comparison, can earn ten times as much.
Furthermore, customers and vendors nowadays are increasingly using e-commerce in B2B, which makes prices more transparent and further erodes margins. This trend will only accelerate, now that Amazon has entered a € 4.00 Trillion American B2B market.
Distributors of IT, industrial and medical supplies are facing growing pressure from Amazon Business, which exceeded € 10 billion in annual revenues three years after its launch. One leading American industrial distributor, W.W. Grainger, was quick to slash prices following Amazon’s incursion into its space.
Moreover, it is not just pricing transparency, which makes competition harder. It is dynamic pricing itself. Amazon is a company built on data and can manage prices dynamically. This fact alone raised the bar for every B2B distributor to price proactively and to invest in pricing analytics.
If your company is still not using a dynamic pricing strategy, do not despair. Recent research shows that, in the USA, less than one in five B2B company prices dynamically. Market leadership will come for those who do start first.
How to implement dynamic pricing in your company?
Implementing a dynamic pricing strategy in B2B represents a sub-strategy in a general pricing strategy. Approaches to adopting a dynamic-pricing approach differ from one industry to another. There are, however, some steps sales executives can take to successfully roll-out a dynamic-pricing strategy.
The first in a dynamic-pricing strategy, as with almost any plan, involves a general assessment of the business case. Executives can identify the potential impact of pricing services and products dynamically to create a strong business case. Postpone any discussion about IT landscape, software for dynamic pricing, pricing analytics or data available until you have drafted a business case first.
Dynamic pricing is a business solution, not a new IT tool.
Do not wait long. Research from Bain shows that if a company is not actively managing prices, it is losing 2 to 4% in operating profit every year. Some pricing analytics software will help you to estimate the impact of dynamic pricing for your company.
Parallel to assessing the case, put together an expert team to lead the project and work on mind-setting. Change is critical. Legacy software won’t impede your success with dynamic pricing; legacy thinking will.
Now for the second part of a dynamic pricing strategy: Find a partner with a dynamic pricing solution. An effective approach is to start with a pilot project. Companies with a bias for action perform better, learn faster and avoid risks. Get as many insights as you can from this pilot project and improve the long-term assessment.
Pricing analytics software helps successful companies to capture value by enabling precise and predictive pricing strategies. Besides, they make salespeople more confident during negotiations.
Finally, companies thriving with dynamic pricing are wise to adapt their pricing processes, giving their pricing analytics software a prominent role.
Successful dynamic pricing is the result of people, process and software tools.
Improving a price strategy means setting an optimal price for each customer and product. Thanks to dynamics pricing, this improvement can, at least in theory, happen in each customer transaction.
People and their skills are a critical element in a dynamic pricing strategy.
Who is doing pricing in your company? Analytical skills are important. However, openness to new technologies, context-awareness and communication skills are incredibly relevant.
This skillset is complementary to the pricing software tool that will guide your dynamic pricing. Successful sales representatives can implement dynamic pricing in B2B if they understand how pricing analytics software work and use their instinct and communication skills. Matching employees possessing these skills with the right tool will determine the customer experience: how your customers see and react to your dynamic pricing.
If a B2B pricing software is the father of your customer experience, processes are the mother of customer experience. Using the best pricing analytics software and algorithms are not enough to sustain a significant impact. Companies need to put equal focus on processes: how exactly will your employees work with the software.
What is dynamic pricing in B2B sales and how can you implement it in your company – Summary:
All companies in B2B set prices – somehow – dynamically. Some take years to adjust them to new market conditions, some minutes. This time-lag makes a significant difference in financial results.
Furthermore, the degree of confidence with a sales representative quotes a new price and the time she needs play a significant role in dynamic pricing. The successful implementation of an effective pricing strategy depends, in short, on the salespeople, process and software tools a company employs. Modern pricing analytics software predicts prices and reduces pricing costs.
The price a company can charge for a product or service is one of the variables with the most significant impact on earnings. In addition to this obvious truth, dynamic pricing is becoming increasingly relevant due to the expansion of e-commerce in B2B and the advent of advanced analytical tools.
The first step to successfully implement dynamic pricing is the general assessment of your business case. What would a five per cent price increase mean for your company? After that, create a proof-of-concept using a B2B pricing software. Finally, consider what pricing processes you need to modify. Start small and start soon. Find a solution partner and select an internal project owner.
Do you have any further questions on Predictive Sales Analytics? We are happy to help!
Christ, S.: Operationalizing Dynamic Pricing Models: Bayesian Demand Forecasting and Customer Choice Modeling for Low Cost Carriers, Gabler, Wiesbaden, 2011
Gönsch, J.; R. Klein, M. Neugebauer und C. Steinhardt: Dynamic Pricing with Strategic Customers. 09/2012, Universität Augsburg.
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