The debate of the existence of elasticity in B2B markets is a fun one, for those of us who like to discuss such things. It’s an academic argument that’s far from the reality of life as a salesperson trying to close an individual deal. Those who are elasticity naysayers come armed with demand curves and macroeconomic textbooks, citing the work of Alfred Marshall almost 100 years ago. Their case against price elasticity in B2B markets hinges on the applicability of “perfect competition” assumptions cited by Marshall. Here are assumptions they reference as not aligned with market realities:
- All sellers DO NOT have products with equivalent value to the buyer;
- Buyers DO NOT have perfect knowledge of the competitive options;
- There is NOT ALWAYS equal power between buyer and seller.
The argument concludes that since these conditions do not hold in B2B markets – and, in fact, all markets – the concepts of elasticity are not valid in real-world negotiations. This is when the chorus of pricers, consultants and vendors declare victory against the existence of elasticity in B2B markets.
First, let me start by saying that I completely agree with the argument above – price elasticity rarely exists in B2B market. But that does not mean that elasticity, in any form, does not exist.
In my blog post on Myth #5, I recounted the story of how my wife and I analyzed and made an offer for our current home. Although we did not apply the ins and outs of the mathematics of elasticity, we used a “back of the envelope” calculation to gauge the likelihood of acceptance of our offer to the seller. Offer at a low price per square foot and my bid was likely to be rejected or countered. Offer at a high price per square foot and my bid was likely to be accepted. Doesn’t this sound like elasticity to you? Sure, maybe it’s not the classical definition that you and I learned in business school, but undoubtedly a seller’s willingness to accept a bid changes, based on the price offered.
This is where the academic community has done a woefully poor job preparing business leaders on the realities of elasticity in negotiations. Much has been written about and taught on the subject of price elasticity. Very little research and teaching has been done on win elasticity. Some of the best work in this area was done by Vishal Agrawal and Mark Ferguson in their paper, “Bid Response Models for Customized Pricing” and Robert Phillips book “Pricing and Revenue Optimization.”
For simplicity purposes, let’s define “win elasticity” in this context as the probability of winning a bid at a given price that balances a seller’s desire to make the deal, versus that of decreasing profit from accepting a lower price. Salespeople face this situation every day. Lower your price and be assured of living to negotiate another day. Hold your ground on price and risk losing the deal, even though there is a chance you and your company make more money. What should they do?
Without tools that deliver this type of intelligence, salespeople are forced to use their experiences and intuition to estimate a customer’s willingness to pay. And which direction do you think a new or poorly performing salesperson tends to lean if they do not have experience or intuition … lowering their price or holding their ground?
An increasing number of companies have learned to harness the power of the big data within their enterprises to calculate win elasticity and provide their salespeople with better insight and intelligence for their pricing and sales teams. The result is revenue improvements of 3% or more and profit improvements of 15% or more.
How much of your company’s lost revenue and profit are you willing to bet that elasticity does not exist? And what happens when your competition deploys this type of technology sooner than you?
Which side of the elasticity debate will you be on then?