Practice Article

Optimal pricing models in B2B organizations

Received (in revised form): 1st July 2011

Rafael Farres
Agfa Graphics, Mortsel, Belgium.

Rafael Farres is currently Head of Strategy for Agfa Graphics. He has been Head of Pricing for Agfa from 2005
until 2011.

Correspondence: Rafael Farres, Agfa Graphics, Septestraat 27 2640 Mortsel, Belgium

E-mail: rafael.farres@telefonica.net

ABSTRACT This article discusses the application of value-based pricing strategies in B2B companies.
It explores the conditions for implementing value-based pricing strategies in companies selling a portfolio
of products competing in a variety of different market segments. The article also discusses the limits of
value-based pricing strategies and suggests ways to overcome implementation pitfalls.
Journal of Revenue and Pricing Management (2012) 11, 35–39. doi:10.1057/rpm.2011.36;
published online 9 December 2011
Keywords: value-based pricing; B2B pricing; implementation of pricing strategies; pricing practice

INTRODUCTION In this article, we analyze this question and

In recent years, once the opportunities for explore alternative pricing models and their
production optimization and fixed cost reduc- scope in B2B companies.
tions have reached their limits, many companies
have begun to look at pricing as the last lever VALUE PRICING SCOPE
with which to improve profits. Pricing manager Value pricing means setting the sales price
has become a new function, and pricing depart- around the value that a product can deliver to
ments have analyzed pricing in much greater its customers rather than as a mark-up of the
detail than before. As a result, new pricing product cost. But how do customers perceive
models have been implemented, with different value? And, more specifically, do customers
levels of success. B2C companies have been who buy a product to produce another one
pioneers in this area, trying to understand (B2B) perceive its value differently than end
customer perceived value and introducing con- users who buy a product in order to use
cepts such as ‘value pricing’. it (B2C)?
The term is very attractive, especially if we In our view, value pricing is applicable to
consider the extra revenues that pricing experts products that have the potential of being differ-
tend to predict with a value pricing approach. entiated from competitors. It is also true that
Not surprisingly, there has been a lot of hype value pricing techniques, such as conjoint ana-
around the concept. But is value pricing the lysis can help to highlight the product values
ultimate model, and can it be implemented in around which companies can apply value pri-
all business situations? cing. But this is not always the case, and it may

& 2012 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management Vol. 11, 1, 35–39
www.palgrave-journals.com/rpm/
 Farres

be that a company is confronted with a product VALUE PRICING

that is equal or inferior to that of a competitor. In a situation where distinct product values can
In these situations, it may be necessary for the be identified, value pricing can be implemen-
company to mirror the competitor’s strategy ted. This does not mean that the values are
or to closely follow its production costs, in necessarily intrinsic to the product itself. They
order not to lose money. may reside in the service or in other elements
that distinguish the offer from a competitor’s.
DIFFERENCES BETWEEN B2B When launching an innovative product, a
AND B2C PRICING B2B company has a competitive advantage.
The value perception in B2B is often driven by This advantage can be translated into a price
factors that are different from those in B2C. that will result in a sufficient sales volume to
This is because the products supplied in B2B deliver an optimal margin. The trade between
are normally intermediate elements in a value price and volume is critical to achieving opti-
chain from which a final product is produced mal profitability with the new product. Con-
for the consumer. Therefore, in B2B, customers joint and price-sensitivity analysis are very good
will assess a product in terms of the value it tools for achieving this.
can add to their value chain. As a result, buy- In other situations a product may not have
ing decisions in B2B are more objective and a competitive advantage, but a company may
fact-based. Product specifications are often be able to reposition or bundle it with other
measurable, and customers will try to translate products or services to differentiate the offer.
them into the value they can add to their value In a way, this can be equivalent to launching
chain. an innovative product, in the sense that the
In B2C, it is the end user who defines the bundle is the new product. This may enable the
‘perceived’ value of a product. Here, consumer company to apply value-based pricing strate-
buying decisions can be more subjective (based gies. This allows companies to use value pricing
on product appearance, personal feelings and so as in a new product launch.
on) than fact-based. Brand recognition and In B2B it is important to understand how to
packaging have a strong influence on B2C approach the customer. In most B2B situations,
buying decisions, and therefore advertising can the business negotiation is unavoidable. In this
play an important role. This is why in B2C the case, training the sales force in a product’s new
brand has much greater value than in B2B. This features is key to being able to communicate
explains that B2C companies typically have value to the customer. In this situation, top-line
much richer advertising budgets than B2B growth incentives can be very appropriate.
companies. But how to communicate value in B2B, where
So, how does a company define an optimal the product is an element in the customer value
pricing strategy? Let us analyze the different chain? Customers will try to compare a product
pricing options (see Figure 1). with its competitors, evaluating the potential
savings or additional values they can achieve.
Therefore, you need to evaluate the contribution
Commodity Value proposition of your product to the customer’s value chain.
Cost of ownership analysis and ROI are therefore
“Cost “Market Based” “Value
Plus”
critical in B2B price negotiations.
Pricing Based”

Pricing as an uplift Pricing Pricing is defined

on full production follows based on customer MARKET-BASED PRICING
(or variable) costs competition perceived value
We need to differentiate market-based pricing
Figure 1: Basic pricing model. from value pricing. It may not be possible to

36 & 2012 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management Vol. 11, 1, 35–39
 Optimal pricing models in B2B organizations

140.0
“Prices that a
company’s sales
120.0 force considers to be
its selling prices”

Price per customer

100.0

80.0

60.0

“Prices that the

40.0 company’s
competitors
perceive to be its
20.0 selling prices” Customer price
Average Price
0.0
0 0 0 0 0 0 0 0 0 0 0 0 0
,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
10 2 3 4 5 6 7 8 9 10 11 12
Volume

Figure 2: Pricing cloud.

differentiate all products, but they still must pricing. This may require a ‘competitors pricing
be sold at competitive price levels. For many intelligence’, in order to understand under
products, prices are highly comparable and well which conditions their prices are given, and
known in the industry. But if a product cannot why they follow certain price moves. It is also
be differentiated, what then should the pricing necessary to know if a competitor’s prices are
strategy be? differentiated by segment, customer size, for
The main issue in market-based pricing is to strategic reasons, or as a reaction to specific
determine true market price. Most companies competitors. A company should also consider
are confronted with price differences between how its pricing actions will be perceived by its
customers, as a result of the historical accumu- competitors and to what extent it may force
lation of different price negotiations. This can them to react.
be easily visualized in a graph that compares Thus, the true market price for a product
price with volume per customer (Figure 2). is in most cases higher than the price at which
What happens is that a company’s com- it is selling today.
petitors perceive only its lowest prices (lower
circle), whereas the company, in particular its
sales representatives, perceive it to be selling at COST PLUS PRICING
average prices (upper circle). This happens Under certain conditions, prices must be
because salesmen provide feedback to manage- aligned with production costs. This may be
ment only where they experience pricing determined by aggressive or even desperate
problems, typically to request a lower price. competitor moves, which may force a company
Although the company sees its average price, its to set prices with extremely low margins, or
competitors will be convinced that its average even at a break-even level. Such strategies are
selling prices are at the level of the lower circle often adopted in situations of overcapacity or
in the graph. But that same company views its underutilized production lines. Competitors
competitors’ prices in much the same way. In must fight for volume just to survive. What is
other words, a company will perceive the low- the appropriate pricing strategy in these cir-
est prices of its competitors, creating a distorted cumstances?
view of real price levels. First, the business environment must be
The only way to counteract this negative understood. An analysis of the available capacity
price effect is to understand one’s competitors’ in the market versus the market requirements

& 2012 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management Vol. 11, 1, 35–39 37
 Farres

and estimated future trends will help a company Basing incentives on margin
gauge whether it makes sense to continue with When margins are rich, incentives based
a particular product or not, and what the on growth are appropriate, but in cost plus,
alternatives are. margins are small. In this case, a company’s
An analysis of competitors’ production costs sales incentives should be based on margin. If
and their financial situations will shed light on its sells at a 10 per cent margin on average and,
the chances of potential competitors’ exit or thanks to negotiation, a sales representative is
consolidation processes. Understanding this will able to achieve a 1 per cent higher price, the
help a company to determine the most appro- company’s margin increases by 10 per cent, and
priate pricing strategy. this achievement can be rewarded.
For cost-based pricing, the following price
steps are critical:
BUT HOW LOW CAN A
Price controlling COMPANY GO?
A pricing discipline is always important, but in In order to link prices to costs, a company must
this case it is critical. If prices must closely understand well its manufacturing and distribu-
adhere to production costs, a company cannot tion costs; not all cost components are fixed,
afford to make any mistakes in implementing a and some will vary under different circum-
pricing discipline, because they will result in a stances. If the company’s line is at 90 per cent
loss. Therefore, it is even more important capacity occupation and its fixed costs are
to have the customer price conditions well already covered, this extra 10 per cent of
documented to ensure that the agreed price is production will cost very little. But where is
achieved in full the limit? To determine this, the company must
consider its ‘incremental costs’.
De-bundling products Incremental costs are the costs per unit
Bundling products renders prices less trans- of incremental production. Evaluating incre-
parent, because the customer and the com- mental costs requires separating the fixed-cost
pany are comfortable with the values that components, such as factory amortization and
the combination is providing. In a bundle, fixed labor, from those that increase with every
a company offers its product in association extra unit produced, such as raw materials,
with another product or service that the energy and variable labor. Incremental costs
customer often uses at its discretion. When define the lowest price limit. Below these prices
prices are set close to their cost, a company the company is destroying cash.
cannot associate any discretionary products
or services with it, as they may be overused.
In a cost plus pricing scenario, everything CONCLUSIONS
provided should have a price, which the Value pricing strategies are complex and require
customer may take or leave. a great deal of market research to capture
customer perceived values, price sensitivity and
Linking prices to relevant indices other critical factors. On the other hand,
The cost of some products may be partially pricing strategies are strongly linked to overall
linked to the price of a specific raw material or a company strategy, and cannot be dissociated
currency. In these cases, a company may offer its from them.
price linked to the evolution of this index. Therefore, before defining a pricing strategy
Currencies and the most typical raw materials, a company must have a clear picture of
such as metals, trade today in public markets, the market, segments, current and estimated
and these indexes are easily available. future trends, the competitive landscape, and its

38 & 2012 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management Vol. 11, 1, 35–39
 Optimal pricing models in B2B organizations

products and values. Only with this information the company focus on the critical points of its
can it formulate a business and pricing strategy. strategy and avoid the time and costs associated
With this plan in mind, a company can with implementing the wrong one.
define pricing strategies for each product/ Value pricing techniques should be applied
market-segment combination. Defining what where they can deliver value, rather than indis-
each type of situation calls for – a value, market- criminately over a company’s entire product
based or cost plus pricing strategy – will help portfolio.

& 2012 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management Vol. 11, 1, 35–39 39