Posted By IndustryArchive.Org on 03/25/2018 Pricing Strategy

Boost B2B Profitability with 6 Smart Pricing Guidelines

By: Robert Hennessey

Boost B2B Profitability with 6 Smart Pricing Guidelines

The number one pricing objective is to prepare your pricing policies before you establish specific prices for your products or services. Then outline and decide your pricing objectives. Make careful decisions regarding the pricing strategy and methods best suited for your business and industry.

Remember, your most crucial business goal is to achieve maximum profitability, not sales dollars or unit volume. Only profitable sales pay your bills.

  • selecting your specific product/service pricing strategies

  • establishing your actual selling prices

Also, you should.

  • do your homework and gather competitor pricing from the marketplace

  • Do NOT call your competitors for their prices - this is illegal in the U.S.

Below are general guidelines for developing the pricing of a new product/service for your business. Unfortunately, there is no formula to determine the "best pricing." Here is an overview of an example of a B2B Pricing Strategy for small business.

  1. Make Product or Service Marketing Mix Decisions
    Developing a portfolio of products and services is vital to profit success. Having a variety of products and services at various pricing levels and profit margins increase your flexibility in setting prices and ability to set promotional and discount pricing.
    • define the number and type of different product or services by price  level high, medium and low and by profit margin dollars

    • identify the projected sales volume distribution of your products or services

    • describe specific promotional tactics that will be necessary for each product or service to meet volume goals in your sales forecast

  2. Project Customer Demand
    It is essential to understand the impact of your pricing on sales by estimating how your customer demand may fluctuate with price changes. For existing products or services, you can experiment with prices above and below the current price to determine the impact of pricing on customer demand. If your volume does not decrease with raising your price, this indicates that taking price increases might be feasible.

Sometimes taking a price increase even with a decrease in demand is advisable as long as the total profit margin dollars generated by the lower volume exceeds the total profit dollars produced by the product previous to the price increase. This price increase tactic is an excellent example of pricing for profit.

  1. Calculate Product/Service Cost
    To make a profit from the launch of a new product or service you need a basic understanding of the costs involved. The unit cost of your product/service sets the lower limit of what you might charge and determines your profit margin at higher prices.

    The total unit cost of your product or service is made up of a fixed value regardless of the quantity you produce and the variable cost of providing each additional unit. Your pricing policy should consider both these costs.

    • fixed costs - office rent, interest on the debt, insurance, equipment expenses, business licenses, and salary of permanent full-time workers

    • variable costs - production labor time, materials & packaging

  2. Understand External Influences
    Pricing must take into account the competitive and legal environment in which your company operates.
    • Competitor Pricing Actions 
      • what are the implications for your business

      • competitor reactions to your pricing decisions

For example, setting the price too low may risk a price war that may not be in the best interest of anyone. Pegging the sales price too high may attract a large number of competitors who want to share in the profits.

    • Legal Constraints
      • There may be price controls that prohibit pricing a product/service too high

      • Offering a different price for different customers may violate laws against price discrimination

      • Pricing it too low may be considered predatory pricing or "dumping."

      • Collusion with competitors to fix prices at an agreed level is illegal in the U.S.

  1. Establish Pricing Objectives - Pricing objectives state the overall goals you want to achieve through your pricing efforts. Because, pricing affects most business areas including finance, accounting, and production. The primary pricing objectives are market share, meeting competition and profit.

    • Maximize Profit - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits

    • Maximize Revenue - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs

    • Maximize Quantity - seeks to maximize the number of units sold or the number of customers served to decrease long-term costs as predicted by the experience curve

    • Price Equilibrium - seeks steady state pricing to avoid price wars and maintain a moderate but stable level of profit

  2. Determine Prices - using the information collected in the above steps, select a:
    • pricing method

    • develop your pricing structure

    • define if, how, when and under what specific circumstances you will use any promotional or discount pricing

Bottom Line
Following the pricing; guidelines outlined above will help your firm to make sound pricing decisions and establish a solid foundation towards achieving and maintaining business profits over the long haul.

More Pricing Information

How to Produce a Profitable Bottom Line with a Proven Pricing Strategy

7 Surefire Pricing Methods to Drive Profits

Popular Promotional Discount Pricing Methods that Work

When Is a Low Pricing Strategy Good for Your Business

Why You Need to Display Prices On Your Website

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