Since the dawn of business, supply and demand have determined the value of goods. In a globalized and digital world in which information speeds across networks every second, the requirements placed on existing pricing methods and price processes are changing. Conventional pricing methods simply cannot keep pace with the speed and number of influencing factors on the market and are receding farther and farther into the background. Ever changing market conditions and incredible product diversity make it impossible for retailers to determine the optimal price for every product at any point in time.
Pricing software determines the optimal price of a product at any given time. It can adapt thousands of product prices, completely automatically, to customer behavior and constantly changing market and corporate situations. When it comes to B2B, a pricing solution must take into account special, market-specific challenges. This article discusses why dynamic pricing makes sense in the B2B market, the challenges that exist and how a pricing solution addresses those challenges.
Why dynamic pricing in the B2B market?
Increasing digitalization poses new challenges for B2B companies. Rising price transparency due to online business makes the use of new pricing strategies necessary.
When implementing a pricing solution, you should ask yourself these important questions to arrive at the appropriate price strategy: How do I want to position myself as a retailer/manufacturer in terms of price policy? What are my goals: Sales growth, increased earnings and/or sales optimization? Which products in my portfolio generate the most turnover? What products are suitable for gross profit levying due, for example, to minimal price sensitivity or quick availability?
If the answers are clear, the appropriate pricing algorithm is selected to reach your goals. If you are interested in combining different pricing strategies, such as gross profit and sales optimization, you should conduct a strategy prioritization as well as the corresponding allocation to the desired product range. A pricing solution automates your price processes – this frees up category managers, leaving much more time for strategic pricing issues.
In reality, pricing in the B2B environment is still frequently carried out using Excel sheets with base prices, standard discount lists, different quantity scales and a large number of customer-specific prices. However, the days of negotiating prices in a firmly defined rhythm and those prices remaining unchanged until the next negotiation are over. Rigid price cycles mean that a considerable portion of the margin lies idle: For example, if the price of copper goes up, so too should the price of products containing copper. As a B2B company, not adapting prices in a timely manner means that there is little or, in the worst case scenario, no margin left.
What challenges does a pricing solution overcome in the B2B market?
The goal of a pricing solution is to find the optimal price as regards your objective as a retailer. In so doing, the pricing solution calculates the prices for both the store and the online shop based on the predicted price acceptance of your customers. The B2B market stands out thanks to a few specific features that a good pricing solution should take into account when calculating prices:
1. Special conditions for different customer groups
A pricing solution should be able to take into account differing conditions for your different customer groups. In the B2B environment in particular, it is common for prices to vary depending on the customer group. There can be various reasons for this. Price scaling is often linked to the sales volume of your customers. Those who order more generally receive higher discounts. It may also be that your customers receive different prices according to region: Companies in regions with little industry count less than companies in metropolitan areas.
2. Price corridors as an important indicator for sales
A pricing solution provides your employees in sales with an important tool by calculating price corridors and price brackets. Your sales staff can assess, even within the price bracket, what price they want to offer the customer (especially as regards point 1). Calculating the price corridor guarantees that the prices always stay within the secure earnings range. However, sales staff have the freedom to make their own decisions.
3. Special agreements in the industry
Sometimes manufacturers and retailers make verbal agreements in the B2B sector. Companies agree, for example, on a certain margin for a product that no competitor may shoot below. Companies are generally careful to honor these agreements to save face in front of the competition and customers. A pricing solution should also be able to incorporate this special feature in its calculations.
4. Delivery availability determines price
In the B2B environment, the availability and delivery time of a product is strongly reflected in the price. Delivery availability is an important parameter when it comes to calculating the optimal price. Whether or not a product is available quickly or not for six weeks affects the price. Example: If a trucking company needs a new transmission for a bus, the company is generally prepared to pay more if the transmission is available for delivery the same day to avoid loss of earnings due to downtime. A pricing solution takes into account the delivery availability of each of your products when calculating the price.
5. Bonus optimization and marketing development funds
In B2B it is common for companies to offer buyers a sum of money to advertise certain products in the form of a marketing development fund (MDF) to promote the sale of these products. The amount of the MDF is often based on the sales volume of the previous quarter. So: The higher your sales quantity, the higher the MDF you receive. The bonus functions in a similar way: You, the retailer, receive a bonus from your supplier when you reach a certain sales quantity for that supplier’s products. In order to make this sales quantity and the bonus from your supplier a reality, the pricing solution optimizes the sale of these products based on a specific sell-by date. In other words, the pricing solution looks first and foremost at the product inventory and the remaining time for it to sell, reducing or raising the price accordingly.
6. Different objectives require different pricing strategies
In both the B2B and B2C environments, the objective of the company is crucial for the pricing strategy: Do you want to optimize turnover, gross profit and/or inventory? The right pricing algorithm is selected according to the defined goal. If, for example, the sale of a product group is to be accelerated, the pricing algorithm predicts the realistic sell-by date per product using the item master data, e.g. using the inventory or current live and transaction data (indicators for market demand). Depending on how much the prediction differs from the sell-by date set by the category manager, the pricing solution adjusts the price up or down.
Automation and price optimization: Use dynamic pricing to stay competitive in the B2B market
As the manufacturer or retailer, you can use dynamic pricing to boost hidden earnings because you are always offering the optimal price for every product. This is possible because a pricing solution incorporates many influencing factors regarding demand and market in real time into the price calculation. And as the manufacturer or retailer, you determine how many times a day your pricing solution adapts product prices. The most important benefits for you:
- Save time: Dynamic pricing automates the calculation of millions of products, giving the category manager time for strategic decisions regarding price and product range.
- Optimization of earnings, turnover and/or inventory: Dynamic pricing takes the special features of the B2B market into account and optimizes your earnings, turnover and sales according to a predefined price strategy.
In order to incorporate the special features of the B2B market into the pricing, a pricing solution must provide a number of setting options. The prudsys Realtime Decisioning Engine (prudsys RDE for short) offers 20 freely assignable parameters per product within a clear framework. As a retailer, you can store the product properties here e.g. color, category and intended purpose. You can also determine which products should take into account the prices of the competition and which should not. Or, you can store information for an item stating that it is prohibited to go below a certain margin (see point 3). You can also determine a certain pricing strategy for the respective item based on the parameters at the product level. That strategy differs from the global pricing strategy.
If you would like to know more about the benefits, applications and technology behind dynamic pricing via the prudsys RDE, we recommend our white paper entitled “Dynamic retail price optimization”.