Product Pricing Strategies: The Cons of List Pricing

January 22, 2019 Priya Sapre

Over 62% of enterprise B2B companies expect eCommerce to be their dominant sales channel in the next five years. And with that, more than 50% of their business will transact with little or no help from a sales professional.

In this new environment of self-serve business transactions, delivering the right price, every time, is critical.

Yet most B2B companies have maintained list pricing as part of their core product pricing strategies, which falls short of delivering the right price in the eCommerce world. List prices are reference points for beginning sales negotiations, primarily derived in either of two ways:

  • The estimated end consumer price, such as the price of a brake pad in the store.
  • A cost-plus price where the price increases with every vendor cost increase but does not necessarily adjust in times of vendor cost reduction.

Why does the list pricing strategy fall short as B2B enterprises rely more on eCommerce and omni-channel sales strategies?

First, list pricing strategies assume a negotiation, but in the self-serve eCommerce channel, the negotiation aspect of the sale is taken away. Remember, a key principle of a list product pricing strategy is to set great prices to begin a negotiation. To make a quick transition to capturing the online market, many businesses make the mistake of using one of their catalog prices for their online product catalog. The savvy buyer is very quickly turned away, since it is not in the ballpark of a realistic price.

Second, costs (and, hence, end consumer prices) are fluctuating at a higher rate than ever before. One of the reasons is due to changing business models. Fewer buyers are willing to get locked in to the terms of a three-year contract, or all-you-can-eat licenses. The preference is to reduce the risk of the purchase by leveraging subscriptions (pay as you go) to achieve better alignment to value received. Traditional list pricing practices of biannual and even quarterly mass price updates are simply not frequent enough; these prices are out of date the day after publishing.

Third, the high non-negotiated list price will imply a direct loss of business and curtail market share growth of new customers and business. The negative impact is compounded by the inability to react to the market fast enough. This affects the buyer’s perception of the vendor’s ability to do business, causing a loss in trust and driving them to look for other vendors.

How can B2B companies leverage a smart dynamic pricing strategy as a driving factor for omni-channel success?  In order to stay ahead companies will need to move away from list pricing and adopt different pricing strategies.

Ensure that prices are tailored for every unique customer interaction with the important assumption that no negotiation will take place. This will serve today’s modern buyers, who are choosing self-serve channels because they want the fastest way to order their products and services.

How? Pre-calculating the near-infinite number of potential interactions is not the answer. It is a waste of expensive time and storage, since a high percentage of these generated prices will never be used. Let’s explore a practical approach for a dynamic pricing strategy.

The foundation is established by setting up pricing rules based on three main inputs of your dynamic pricing strategy:

  • Value to Buyer – Use a pricing optimization algorithm to ensure the value of the product to the buyer has been accurately captured.
    • Based on historic purchase patterns, it is possible to cluster customers together based on their willingness to pay for a product, while capturing seasonality and external market trends.
    • Using this method, businesses can easily identify customers buying below the segment’s average price, given the overall value perception of the product to the customer segment.
    • This ensures that the price can be adjusted based on the customer’s buying conditions, such as packaging or region of purchase.
  • Competitive Landscape – Set up rules to ensure you are within relative range to your competition.
    • Overlaying value-based pricing with captured market conditions ensures that the pricing is always relevant.
    • Competitive data is easier to attain due to eCommerce web scraping. The accuracy of this data is improving due to simplified pricing with limited hidden rebates.
    • These pricing rules ensure the price is always within a range of your main competitors. This does not simply follow competitive price fluctuations, but instead keeps prices within a reasonable range to ensure your offering is always in the race.
  • Profitability – Set up rules to ensure you are maintaining the expected profitability of your product lines.
    • Analytics based on historical transactions ensure that you have a clear understanding of the profitability waterfall.
    • This input is based on your business strategy, ensuring that every product line and region is within range of the prescribed profitability.

Long-term dynamic pricing success requires an iterative process to measure, learn and adjust. For example, there are going to be situations where competition is undercutting your revenue and profitability. Monitoring abandoned carts, market trends and relationships are important to ensure that you are relaxing or tightening your rules on a periodic basis. This iterative approach will help your business stay close to the changing needs of buyers.  

Delivering dynamic pricing strategies across all sales channels is key. Ensure that your organization invests in tools that can provide the capabilities of a real-time pricing engine. This further ensures that you are not only providing the right price to your eCommerce channel, but that these prices are harmonized across all your sales channels.

Are you on the right path?

The right solution always starts with defining an end goal and a strategy to feed that goal. If your long-term vision includes driving share through eCommerce, consider whether you're taking the right steps today to get there. Start small, e.g. focus on your most volatile products, where end consumers are more accepting of price fluctuations. Create a tailored pricing structure, such as the one mentioned above for one of your product lines. Measure the success rates, learn from the outcomes, iterate and expand!

Potential customers are trolling your website as you read this article, but are they buying from you?

Learn more about the benefits of dynamic pricing in this video

About the Author

Priya Sapre

Priya Sapre, Product Manager at PROS, manages the product strategy for PROS pricing solutions. She has a passion for pushing the bounds on how technology can be leveraged to empower sales and pricing professionals to deliver high impact results. For the past eight years, Priya has designed large-scale enterprise solutions that leverage artificial intelligence to help US and European manufacturers and distributors to achieve their digital transformation goals. Priya has has a Masters in Computer Science with a specialization in Information Systems from Illinois Institute of Technology, Chicago and a Bachelors of Engineering in Information Technology from the University of Pune, India.

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