B2B Dynamic Pricing – What Is It and How Can You Implement It In Your Company using Software
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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 increasingly accepted in manufacturing and industrial distribution as well.
Dynamic pricing is not without controversy. Critics argue that dynamic pricing, particularly in the Business-to-Consumer 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 level.
What is B2B dynamic pricing and how can you implement it in your company? Why is dynamic pricing presented as an opportunity as well as a challenge in B2B? How exactly can pricing analytics software help you?
Let’s discuss these points in detail.
Why is Dynamic Pricing Becoming More Relevant in B2B?
Setting the right price has always had a more significant impact on profits than reducing sales costs or increasing volumes. Especially when considering that the average margin of the largest industrial distributors is as low as 1%, manufacturers, in comparison, can earn ten times as much.
Furthermore, customers and vendors are increasingly adopting e-commerce in B2B, which makes prices more transparent and further erodes margins. This trend will only accelerate now that Amazon has entered the €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 market.
Moreover, it is not just pricing transparency that makes competition fiercer. It is dynamic pricing itself. Amazon is an organisation built on data and can manage prices dynamically. This fact alone has raised the bar for every B2B distributor to price proactively and to invest in pricing analytics.
If your company is not yet using a dynamic pricing strategy, there is no need to despair. Recent research shows that, in the USA, fewer than one in five B2B companies price dynamically. Market leadership will belong to those who take the lead.
How to Implement Dynamic Pricing in Your Company?
Implementing a dynamic pricing strategy in B2B represents a sub-strategy of a general pricing strategy. Approaches to adopting dynamic pricing 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 step 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 robust business case. Postpone any discussion about the IT landscape, software for dynamic pricing, pricing analytics, or available data until you have drafted a business case first.
Dynamic pricing is a business solution, not a new IT tool.
Do not delay. Research from Bain shows that if a company is not actively managing prices, it loses 2 to 4% in operating profit every year. Some pricing analytics software will help you to estimate the specific impact of dynamic pricing for your organisation.
Parallel to assessing the case, assemble an expert team to lead the project and work on the internal mindset. 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 proven dynamic pricing solution. An effective approach is to start with a pilot project. Companies with a bias for action perform better, learn faster, and mitigate risks. Gather as many insights as you can from this pilot project to refine the long-term assessment.
Pricing analytics software helps successful companies to capture value by enabling precise and predictive pricing strategies. Furthermore, it makes 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 pricing strategy means setting an optimal price for each customer and product. Thanks to dynamic pricing, this improvement can, at least in theory, happen within each customer transaction. In practice, however, B2B customers are not consumers: they plan projects for months and expect price stability. A quote for a large construction site cannot change its price a week later. Dynamic pricing in industrial distribution therefore does not mean re-pricing every transaction like an online shop – it means adjusting prices in a controlled way when purchase costs, freight or logistics costs actually change.
People and their skills are a critical element in a dynamic pricing strategy.
Who manages pricing in your company? Analytical skills are important. However, openness to new technologies, context-awareness and strong 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 works and combine it with their instinct and communication skills. Matching employees possessing these skills with the right tool will shape the customer experience: how your customers perceive and react to your dynamic pricing.
If a B2B pricing software is the foundation of your customer experience, processes are its driving force. Using the best pricing analytics software and algorithms is not enough to sustain a significant impact. Organisations need to place an equal focus on processes: how exactly your employees will work with the software.
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What is Dynamic Pricing in B2B Sales and How Can You Implement it in Your Company – Summary:
All companies in B2B set prices dynamically in one way or another. Some take years to adjust to new market conditions, while others do so within a matter of minutes. This time-lag makes a significant difference to financial results.
Furthermore, the degree of confidence with which a sales representative quotes a new price, along with the time they require, plays a significant role in dynamic pricing. In short, the successful implementation of an effective pricing strategy depends on the salespeople, processes, and software tools an organisation 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 greatest 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 implementing dynamic pricing is a general assessment of your business case. What would a five per cent price increase mean for your company? Following that, create a proof of concept using B2B pricing software. Finally, consider which pricing processes you need to modify. Start small and start soon. Find a solution partner and select an internal project owner.
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Further Read:
Bages-Amat, A. et. al. (2018): What really matters in B2B dynamic pricing. Ed: McKinsey & Company
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.