B2B Pricing: Effective Price Setting Process

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This article is a summary of a YouTube video "Lec 42 - B2B Pricing: Price Setting Process 2" by IIT Roorkee July 2018
TLDR Setting the right price in B2B pricing requires understanding market demand, buyers' price sensitivity, and considering factors such as switching costs, customer perception, supply and demand, price elasticity of demand, and competitors' costs.

Factors influencing pricing decisions

  • 💰
    The challenge in B2B pricing is finding the right price that balances customer acceptance and profitability.
  • 🤔
    Determining the demand for a complex B2B product can be challenging, as it requires understanding how customers envision the product and its multiple applications.
  • 💰
    Buyers in the B2B market are less price sensitive when the product is important to them and they fear that their work will be affected without it.
  • 🤔
    The value that a product represents to a customer, such as an engine for a car owner, plays a significant role in determining the perceived worth and willingness to pay for a higher quality and higher priced product.
  • 💰
    The value of a product is subjective and depends on the specific needs and circumstances of the buyer.
  • 🏥
    The choice of stent for a patient's cardiac operation can have a significant impact on their health and well-being, highlighting the importance of considering quality when setting prices.
  • 💡
    Understanding the value that customers place on a product, such as avoiding headaches and fear, can help determine the appropriate pricing strategy rather than solely relying on cost-based pricing.

Pricing strategies

  • 💰
    A Harvard study found that a 1% change in price can result in an 11% increase in profits, highlighting the significant impact of pricing on a company's profitability.
  • 💲
    Dynamic pricing is a concept used in various industries, such as airlines, where prices are adjusted based on factors like demand and cost, allowing for flexibility in pricing strategies.
  • 💰
    Pricing can be used as a strategic tool to position a business firm in the market, based on factors such as product quality and competition.
  • 💰
    Companies that adopt a cost leadership strategy aim to sell at the lowest price point in the market, allowing them to penetrate the market and achieve high volume sales, but this approach carries the risk of competitors fighting back and creating a difficult position.
  • 💲
    When setting the price, companies can consider three types of pricing strategies: cost-based pricing, value-based pricing, and competition-based pricing.

Q&A

  • Why is pricing a challenge for B2B companies?

    — Pricing is a challenge for B2B companies because setting the right price is difficult due to the uncertainty of customer response, and pricing too high or too low can result in loss or rejection of the product.

  • What factors should be considered in B2B pricing?

    — B2B pricing requires understanding the company's objective and determining the market demand for the product, as well as considering factors such as switching costs, customer perception, supply and demand, price elasticity of demand, and competitors' costs.

  • How is demand determined in B2B pricing?

    — Demand is the desire for a product backed by the ability to pay, and determining the demand for a B2B product can be done using forecasting techniques, with the purpose of understanding how demand changes with a change in price.

  • What influences buyers' price sensitivity in the B2B market?

    — Buyers' price sensitivity in the B2B market is determined by the importance of the product to them and the costs associated with switching to a new product.

  • What is the impact of price on profitability?

    — Increasing the price of a product can lead to customers switching to a competitor, so understanding price sensitivity is important for assessing the impact on profitability. A one percent change in price can result in an 11 percent increase in profits, and adjusting pricing based on customer willingness to pay is crucial for profitability.

Timestamped Summary

  • 📊
    00:00
    B2B pricing is challenging due to uncertainty, so understanding market demand and buyers' price sensitivity is crucial for setting the right price.
  • 💡
    05:00
    Switching costs and time can affect price sensitivity, with factors such as ease of comparison influencing demand, but the importance of the product and its role in the cost structure determine whether buyers will consider changing suppliers.
  • 💰
    09:42
    Understanding price sensitivity is crucial for profitability as a small change in price can lead to a significant increase in profits, and pricing should be adjusted based on customer willingness to pay.
  • 💰
    14:14
    Pricing should be based on customer perception and supply and demand, with examples like Uber and Ola adjusting prices based on availability and demand, while also considering cost and price relationship, dynamic pricing in industries like airlines, and achieving a balance between break-even and profitability.
  • 💰
    17:08
    Price elasticity of demand is calculated by dividing the change in quantity by the change in price, and a value less than one indicates inelasticity, leading to a 1% decrease in demand for a good with a 5% price increase, causing companies to overlook other important factors when setting prices based solely on production costs.
  • 💰
    20:23
    Customers are willing to pay a higher price for a higher quality product, even if it means avoiding potential problems and expenses.
  • 💡
    23:55
    Understanding fixed and variable costs is crucial in B2B pricing as it helps manufacturers and producers determine the appropriate pricing for their products.
  • 💡
    27:31
    Analyzing competitors' costs and market presence is crucial in setting prices, as it determines the upper limit for pricing and allows businesses to follow the pricing strategy of their competitors, although this approach may result in a loss of value or inadequate cost tracking.
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This article is a summary of a YouTube video "Lec 42 - B2B Pricing: Price Setting Process 2" by IIT Roorkee July 2018
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