I recently reviewed a question posed on a LinkedIn pricing group regarding pricing in a service-related industry. The writer wanted to know how to “beat the commodity spiral” when pricing for B2B services industries. One of the first responders addressed the concept of understanding the key attributes of a company’s service to its customers and then how to monetize the services. He also pointed out the importance of understanding the competitive environment in which a company operates, and the strategies the company is willing to pursue to achieve its goals.
I picked up on those themes and provided some specific tactical suggestions on how to beat the spiral. In my closing, I referenced an article that I have found particularly helpful since my days as a brand manager. At that time, I was responsible for launching new products, from identifying the opportunity to delivering on the bottom line. The article provides a how-to approach for differentiating low-differentiated products and achieving a price premium. A couple of people picked up on the article and I wanted to share it and also offer a few insights.
It’s interesting to note that the article I reference – titled “How to Brand Sand” – created a healthy discussion since it was published by Strategy & Business Magazine in 1998. Given the time that’s passed, there were questions about its relevance. On that front, my response is a definite yes; it’s clearly relevant and far more easily put into practice with the advent of pricing software, the availability of data and the lower cost of IT infrastructure.
The concepts surround segmentation, customers’ willingness to pay, differentiation, bundling and aligning business capabilities are still every bit relevant today. In fact, companies that pursue this approach to marketing low-differentiated products can now be far more effective in 2012 than they were in 1998, when much of the heavy lifting and monitoring of strategies would have been done by boutique management consulting firms.
We have seen a number of approaches taken by B2B services companies that help them outperform the market and avoid the commodity spiral. While perhaps more tactical, these companies operate within the same strategic parameters. Beyond understanding the value of a company’s services versus its competition, B2B companies should also ask the following questions to avoid attempts that commoditize their services:
- What effort have you made to communicate the value differentiators of your service or brand?
- Do the marketing and sales people responsible for price negotiations plainly understand the value, and can they confidently negotiate price with their customers and prospects?
- Have you performed a rigorous customer segmentation to determine their willingness to pay for your services?
- Is there is a true market need or does it make sense to create a lower-value, lower-priced service or brand offering to take advantage of the opportunity without tremendously impacting your existing service?
- Which service offerings can your organization bundle to maintain or increase price?
- Conversely, are you contributing to the commodity spiral by bundling valuable added services – which may be differentiators in your offering – without extracting a premium?
- As an organization, do you truly understand the cost to serve your customers so you can make informed decisions around price?
- Is the price of a commodity input a significant cost of your service? If so, have you considered a specific surcharge, rather than a price increase, to pass along the cost increases?
- Do you have the tools and infrastructure to closely monitor the trends in costs, pricing and the competitive environment that impact your profitability?
The principles of customer segmentation and value differentiation in commodity-goods markets are well explained here. Examples of customers that have been able to put these principles into practice and answer the questions posed are available here. The common themes for those B2B companies that have been able to execute and are profiled in the article offer a vision of the benefits, from improved pricing and putting the people, processes and infrastructure in place to execute on that vision.
I encourage you to take a look at the “How to Brand Sand” at this link. What do you think? I welcome your comments.