Debunking The Top 4 Margin-Killing Myths Of B2B Pricing

B2B companies want to maximize their margins, improve profit performance and increase shareholder value, but few manufacturers are leveraging the power of pricing to achieve these objectives.

There’s a perplexing contradiction that exists in the business-to-business sector. B2B companies want to maximize their margins, improve profit performance and increase shareholder value, but few manufacturers are leveraging the power of pricing to achieve these objectives.

The problem is that many B2B executives are buying into a few commonly-held myths about pricing. In fact, many of these executives and managers are largely unaware of the effect pricing myths are having on their culture and ultimately, their margins and overall financial performance.

By better understanding the most common margin-killing pricing myths in the B2B environment, companies can begin to counter them and make more profitable pricing decisions. Let’s delve into the top four margin-killing myths in B2B — and let’s debunk them.

Myth #1: Pricing has to be Simple to Execute

Nobody likes complexity, but when it comes to your pricing model, simplicity will often push a B2B company into a pitfall. Pricing models that are very basic and rudimentary allow millions of margin dollars to slip through the cracks. Instead, B2B companies need to develop specific, granular pricing models in order to extract more profit. With today’s pricing technology, increased complexity in the underlying pricing model doesn’t make it harder to execute in the marketplace or make it harder for salespeople to embrace. Even the most sophisticated pricing models can deliver price recommendations to the field in ways that are very easy to understand and extremely simple to execute, but with more return on profit.

Myth #2: Experienced Salespeople Know How to Price

How many times have you heard, “nobody knows the customer better than I do” from your seasoned sales reps? Even if your sales teams have years of experience, it doesn’t mean they’re quoting the most profitable prices. They may have a more in-depth understanding of your customers and the industry, but over time, experienced salespeople can learn several behaviors that are not conducive to profitable pricing, such as guessing instead of researching, short-changing the value proposition or assuming competitive responses. In fact, B2B companies with the most experienced sales teams are very often the companies leaving the most money on the table.

Myth #3: Pricing Improvement Puts Revenue at Risk

There is a common misunderstanding around pricing improvement that significantly impacts B2B companies’ financial performance. Many B2B companies believe that improved pricing will necessarily reduce revenues. However, in the B2B environment, the objective of pricing improvement is to precisely identify those specific situations where you can charge a little more with minimal risk. Instead of thinking of pricing improvement as “raising prices,” think about it as “stopping the over-discounting.” Companies can continue to win the business without discounting more than what is really necessary, shifting the perception that pricing improvement is synonymous with raising prices.

Myth #4: Compensating on Margin Ensures Good Pricing

Unfortunately, too many B2B companies believe that margin-based incentive compensation for their salespeople is the solution to all of their pricing problems. However, good pricing behavior is not guaranteed even if salespeople have financial motivation to maximize margins. The fact is that most salespeople play it safe and overestimate risk when it comes to pricing because they’re in fear of losing the deal. In their minds, the positive compensation benefit of getting that additional margin is overshadowed by the negative compensation impact of losing the deal altogether, which ultimately causes them to leave money on the table in the process.

To truly become more profitable, B2B companies should reject the underlying premise behind these margin-killing myths. By doing so, they stand to enhance the quality and accuracy of their prices, boost sales rep confidence and improve their financial performance.

Barrett Thompson is the general manager of pricing excellence solutions at Zilliant. Over the past 25 years, Barrett has built and delivered optimization and pricing solutions to Fortune 500 businesses in diverse vertical industries within the manufacturing and distribution space.

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