How Sensitive are Your Products to Price?
The other day, I had a very interesting conversation with one of our customers. They just completed a customer survey to help determine the core reasons their customers valued them as a supplier. Many items were listed – service level, relationships, ease of procurement, technology, price, market leadership, quality and much more. Price didn’t make the top 5 (according to this customer, it ranked 7th). So what does this mean? Could they charge whatever price they wanted? Probably not — it just means that product volumes change due to many other variables other than price.
To understand the price to volume relationship, let’s look at two very different extremes – captive vs. commodity. On the captive side, let’s consider a highly customized enterprise software solution. Because it’s totally customized to your company – every change, upgrade or enhancement is subject to a work order, statement of work, or new contract. High tech companies who offer customized solutions know this fact all too well. A vital component of your business is in their hands. Their pricing for follow-up on services, maintenance and upgrades can border on egregious.
On the other extreme we have pure commodities. A great example is downstream petroleum products. After initial refinement, oil companies sell unbranded gasoline on an open market. Location, availability, competitive landscape and price are the only variables that need consideration. The lower the price, the more volume – it’s just that simple. Optimized pricing is all about understanding your competitive position and desired volumes at each terminal.
Chances are, your products fall somewhere between these two extremes. You’ve got legacy products that competitors have begun to commoditize. You also have innovative products and contracts that give you pricing power. Many companies struggle to understand which products have a captive audience and those products that have very low switching costs.
Despite this daunting task, there is good news – pricing science can mine your data across all of your products to determine their price sensitivity. By factoring out key variables (economic indicators, complementary products, seasonality and more), it’s possible to uncover the true price-demand relationship. With this knowledge, you can develop value pricing strategies by product line with confidence and understand how the market will react.
B2B Manufacturers and Distributors are departing from mass price increases and embracing targeted price changes based on market sensitivities. How are you making pricing changes?