B2B pricing is the practice of putting a price on products and services targeting businesses and other organizations instead of consumers. B2B stands for “business-to-business,” a type of transaction that occurs between companies.
B2B transactions typically happen in the supply chain, such as between Micron Technology that provides memory and data storage to Apple. Software-as-a-service (SaaS) businesses can also be considered B2B companies. An example is HubSpot that offers software to other organizations.
B2B pricing requires careful planning and strategizing since a product or service is sold to other enterprises. As such, it differs from the pricing methods of businesses that directly target consumers.
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Effective B2B pricing is crucial to the success of a company. More often, businesses focus most of their attention on product development and marketing and fail to treat pricing the same way. But B2B pricing requires more than a day of decision making. Companies have to undergo a whole process to arrive at the best pricing strategy.
B2B Pricing Process
Generally speaking, the B2B pricing process happens as follows:
It starts with knowing the product and understanding its features well. Therefore, it’s essential to form a team composed of members who have high levels of product knowledge. Why is this so critical? Only by understanding what the product can do will the team be able to see its real value.
Selecting a pricing model comes next, and we discuss a few of them in the next section. Conducting B2B pricing-centered market research is also essential, as it helps determine product or service prices. At this point, it could be helpful to ask the following questions:
- What problem does the product or service solve for customers?
- What is the financial impact of that problem?
- How much does it cost to produce or deliver the product or service?
- What price range would customers be willing to pay for the product or service?
- How much can customers afford to spend?
Among the goals is to ensure that the cost of production and delivery does not exceed the price range that customers are willing and able to pay. The cost of the problem the product can solve should also be less than its cost of production and delivery. Otherwise, there would be no profit.
B2B Pricing Models
The most common B2B pricing approaches are cost-plus and value-based pricing. In cost-plus pricing, you add a margin to the product’s unit cost. For example, the cost of making random-access memory (RAM) chips is US$10.00. If you want to sell it at a markup of 20%, you sell the product at US$12.00 apiece.
While this approach would work well for manufacturing companies, SaaS businesses may not find it applicable. The latter usually go for value-based pricing, which entails basing the price on how the customers perceive the product.
The B2B Tiered Pricing Model is among the most popular forms of value-based pricing. You see it in almost every SaaS company. For instance, Slack has four tiers—free, standard, plus, and enterprise.
This pricing model allows businesses to attract a broader range of customers. Those who aren’t willing or cannot pay for the features in the Plus tier can still use Slack under the Standard or Free plan. If the only price point was only US$12.50 per month, a significant portion of Slack’s customer base would be left out.
B2B Pricing Tools
There are several B2B pricing tools and software available in the market today. Transparency Market Research projects that the market will continue to grow in the next few years as well.
B2B pricing software helps companies determine the best price points for their products and services, often by employing machine learning (ML) and artificial intelligence (AI). Some examples of these products are Prisync, Dynamic Pricing, and Pricing Hub.
The B2B pricing process does not stop after setting a price. Businesses have to regularly check the performance of their pricing strategy and adjust accordingly if they see that it’s not effective.