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B2B eCommerce business owners, managers, and marketing professionals responsible for setting prices need to understand the nuances of B2B pricing models and how they impact perceived value, competitiveness, sales, and profitability.
While differentiated pricing models and B2B catalogs are hallmarks of B2B eCommerce, today’s buyers are demanding greater transparency over pricing to aid in purchasing decisions. In fact, 75% of buyers prefer a rep-free sales experience and 29% of buyers say a lack of accurate pricing information is a hurdle to online purchasing. To meet this demand, B2B businesses are taking a closer look at various eCommerce pricing strategies.
This guide will provide an overview of B2B eCommerce pricing in order to help you make an informed decision, including information on:
- The top 6 pricing strategies for B2B businesses and the pros and cons of each
- Key B2B eCommerce pricing best practices
- Common pricing mistakes to avoid for your eCommerce business
What Are the Core B2B eCommerce Pricing Strategies?
Choosing a pricing strategy is a critical step in ensuring your business can compete in the marketplace, drive sales, and support healthy margins. In the following section, we will outline the 6 core pricing strategies for B2B businesses: cost-plus pricing, competition-based pricing, value-based pricing, dynamic pricing, tiered pricing and subscription pricing.
1. Cost-plus pricing
Cost-plus pricing determines the final selling price by adding a set percentage (markup) to the base unit cost. The goal of cost-plus pricing (aka markup pricing) is to cover costs and guarantee a set rate of return for each unit sold that your business deems “acceptable.” Cost-plus is common in wholesale environments and often incorporated into marketing, to establish that a brand is not price gouging.
The unit cost must first be calculated based on the total cost (fixed plus variable costs) divided by the number of units. A variation of cost-plus pricing allows the markup to be a variable (rather than fixed) percentage based on market demand or order size (e.g. volume discounts).
Advantages:
- Easy to calculate
- Ensures a profit margin for each unit sold
- Is easily understood by buyers
- Offers stability
- If standard across the market, decreases the risk of price wars
Disadvantages:
- Only reflects internal factors (production cost) rather than external factors (changes in in demand, competition)
- Does not reflect the “value” of services or software, which cannot be measured or not accurately measured in production costs
- Could result in a price that’s higher than competitor prices
- Is reliant on sales of all units in order to guarantee that rate or return
2. Competition-based pricing
Competition-based pricing involves setting a price based upon the competition, choosing a price that is higher, lower, or the same as the competition. This is otherwise known as premium pricing (high price), loss leader pricing (low price) and price matching (parity).
Competition-based pricing (aka competitive-based pricing) helps remove risk from pricing, particularly across markets with very similar products or services. This strategy may be used across all products or only some products. For example, a business may discount a particular product (a loss leader) in order to attract a buyer in the hope of future or additional sales of products with a higher profit margin.
Advantages:
- Decreases risk for new products or services
- Capitalizes on work done by competitors to establish value for price
- Loss leader pricing can lead to short term market share growth
- Parity pricing discourages buyers from price switching
- Premium pricing can increase profit margins
Disadvantages:
- Highly dependent on others, not on your product quality or value
- Discount pricing encourages price wars and devalues the brand by focusing buyer attention on price instead of brand or product differentiation factors
- Premium pricing requires significant marketing effort to demonstrate the additional “value” attached to the premium price
- Can be labor intensive to stay on top of price changes (unless tools are used)
3. Value-based pricing
Value-based pricing sets prices based on a buyer’s perceived value of the product or service. Perceived value is a measurement of what a buyer is willing to pay. You may set your price at or below the perceived value.
Value-based pricing is ideal for highly differentiated products, products that involve high R&D, or markets with fewer competitors.
Advantages:
- Aligns pricing with what buyers deem ‘fair’ for the product or service
- Reflects brand, product or service differentiation
- Based upon perception, which can be influenced to justify a higher profit margin
Disadvantages:
- Perceived value is difficult to calculate
- Highly dependent on marketing (yours and others)
- Requires constant research into buyer needs, competitive benchmarks, differentiation strategies and buyer feedback
4. Dynamic pricing
Dynamic pricing adjusts the price of the product or service price in response to specific factors, often in real-time. These factors could include specific buyer segments, market demand, inventory levels, buy behavior (personalization), currency fluctuations, and/or competitor behavior. Competition-based pricing can be considered a form of dynamic pricing.
The goal of dynamic pricing is to charge the right price, for the right buyer, at the right time.
Common forms of dynamic pricing are:
- Time-based pricing: time of day, month, year
- Segmented pricing: based on buyer profile or location
- Changing conditions: based on external factors (e.g. competition, currencies), such as competition-based pricing models
- Penetration pricing: initial price is decreased to encourage adoption, then increased over time
- Peak pricing: pricing is based upon demand
Dynamic pricing should be carefully overseen. For long buying cycles, you may need the capability to ‘fix’ prices to help close the deal.
Advantages:
- Strong alignment with buyer behavior and shifting demand
- Supports the complexity of B2B business models (e.g. bulk orders, charge per user, charge per usage)
- Can be used in conjunction with marketing and personalization efforts, e.g. creating time-limited offers
Disadvantages:
- Requires building a model or investing in additional technology
- Requires a constant re-assessment of variables, constraints, market conditions
- Can damage trust and reputation, if pricing changes too frequently, damaging the buyer wish for ‘transparency’
- Requires careful checks and balances to avoid price discrimination
5. Tiered pricing
Tiered pricing creates different price tiers based upon a volume metric or additive levels of features, functionality or access. Tiered pricing can be considered another form of dynamic pricing and is very common with software as a service (SaaS) products and services.
SaaS eCommerce software itself is often tiered, with additive features and reduced transaction costs tied to some sort of B2B sales volume.
Advantages:
- Easy to set up
- Offers a clear differentiation of features or capabilities between tiers, establishing value
- Incentivizes up-selling
- Strongly aligned to businesses with different customer segments and ongoing sales
Disadvantages:
- Could lead to some buyers feeling their lower tier experience is ‘worse’, potentially leading to churn
- Buyers become more sensitive to price changes once they are on an established tier
- Only works for products and services that can be differentiated into tangible tiers
- Hard to establish if others in the market are not also following tiered pricing
6. Subscription pricing
A subscription pricing model involves a recurring set of payments for product(s) and/or services. Subscription models are common for SaaS software, to continue to receive updates or service, for consumable supplies (e.g. office paper), memberships (e.g. industry associations, platforms), and services
Advantages:
- Stable source of recurring revenue (monthly, annually)
- Simplifies forecasting and company valuation
- Often allows for a higher lifetime value vs a single license (for SaaS)
- Helps spread customer cost over time, reducing barrier to sale
Disadvantages:
- Not easy to transition to for established businesses
- Can lead to churn, if customer value perception is low
- Requires oversight to manage renewals, failed payments, churn (excellence in customer service and retention efforts)
Now that you’re familiar with the various pricing models, let’s review the best practices when implementing and running your chosen B2B pricing model.
What Are the Key B2B eCommerce Pricing Best Practices?
The right B2B eCommerce pricing strategy can help attract new customers and retain loyal buyers who then become ambassadors for your brand—the wrong strategy can damage your reputation and trust, leading to higher abandonment rates and buyer churn.
Align with your business goals
At the highest level, it is critical to ensure that your B2B eCommerce pricing model is aligned with your business goals. Work with internal stakeholders to establish internal benchmarks across key metrics such as customer acquisition costs, customer lifetime value, market share, or profitability. Read on for more B2B eCommerce metrics you could incorporate into your business goals.
Actively track wholesale prices (if applicable)
When applicable, tracking wholesale prices can influence the unit cost and final price of a product.
Monitor your competitors’ pricing
The evolution of competitor prices will influence almost every pricing model, helping benchmark if your prices are too high or low, which will impact sales and profitability. Market research is critical to competitive pricing.
Understand your buyer’s willingness to pay
Continual research (quantitative and qualitative) is needed to help understand your target market(s) and their evolving willingness to pay. A buyer’s willingness to pay will evolve with their expectations, influenced by new technologies, their consumer experiences, and the perceived value of your product.
Communicate the value of your products/services effectively
Regardless of the pricing model, buyers must perceive the value in your product before buying it. The more your marketing processes can imbue a sense of value, the greater your ability to increase your margins to capture this added “value” as profit.
Leverage the right technology
Many of these pricing models require access to shifting internal and external data, requiring that businesses have significant tools at their disposal to capture data and translate that data into actionable intelligence. Further, as pricing models become more complex and/or real-time, the more impossible it becomes to manually adjust prices.
Artificial intelligence (AI) tools have emerged to automate time-consuming manual processes related to market intelligence, internal analytics, pricing, keeping pricing and product information in sync across channels, marketplaces and systems. Read on to explore the full range of AI in B2B eCommerce and more on the latest trends in B2B eCommerce.
What Are the Most Common B2B eCommerce Pricing Mistakes to Avoid
Establishing the right pricing model and keeping it relevant over time is one of the more common B2B eCommerce challenges we see from clients. Typically, we see these problems fall into the following areas:
Neglecting cost calculations
Failing to understand internal costs (fixed and variable) can lead to underpricing (lower price, less profit) and either lower margins or business failure.
Inconsistent pricing
B2B buyers are interacting with more channels than ever before (10 channels on average), making it critical that businesses present a consistent price across channels. Where data is siloed across channels, or where dynamic pricing doesn’t carry through channel experiences, buyers are presented with different and confusing information, reducing trust.
Misunderstanding perceived value
A lack of research into customer needs and wants can lead to a model of perceived value that either leaves money on the table or results in an over-priced or under-featured offering.
Not using customer segmentation
Customer segmentation helps you understand and better market to different buyers, which in B2B can include huge variability based on company size, industry, or tracked behavior cues. Tracking information about customers helps create actional customer segments for marketing and sales allowing for the kinds of tailored, personalized customer experiences today’s buyers have come to expect.
Not using geographic segmentation
In addition to customer segmentation, or as a sub-set to that, it is critical that your pricing strategy be adapted for each geographic region you serve, reflecting local competition and price tolerances that can differ between markets as well as factors that may impact profitability (e.g. higher shipping or storage costs).
Underestimating the power of dynamic pricing
Static pricing is safe, but it fails to reflect the constant changes happening in the marketplace. To stay relevant to buyers could mean taking a change on more dynamic, real-time pricing models.
Lacking transparency in pricing
A lack of price transparency is one of the biggest hurdles in the buying cycle. Information hidden behind a paywall or consultation is most likely to lead to customer drop-off in the sales cycle, while hidden fees and unclear pricing structures can erode trust.
Neglecting to regularly review and adjust pricing
Despite the work that goes into setting prices, market conditions change, as do your internal costs. It’s important for B2B companies to regularly review and adjust pricing in order to maintain the bottom line. For some models, this requires thinking far in advance to prepare customers of upcoming shifts to pricing tiers or subscription models.
Introducing too much variability
Although it’s great to align pricing in real-time, introducing too much variability (too many price changes or price changes that are high in nature) can erode trust. Where technology is used, implement appropriate controls and/or human oversight to reduce variability.
While these challenges are common, they can also be overcome with expert advice.
The Bottom Line
Taking a thoughtful approach to B2B pricing models is one of the critical factors to ensuring you can reap the benefits of B2B eCommerce, helping you establish your market position and scale your B2B business.
At Net Solutions, we work closely with our clients to create eCommerce strategies and to implement eCommerce solutions that are tailor-made for their needs. Leveraging our extensive experience, we can help you conduct market and user research, design a pricing strategy and ensure you have the right eCommerce platform and tools to manage your pricing strategy over time.
Learn more about Net Solutions eCommerce development services.
