1. B2B Pricing Basics

2. Traditional Approaches for Pricing
Based
Approach Upside Downside
on
Cost-plus Costs • Focus on profit • Ignores market factors
• Ignores customer value
• Costs can and will change

3. Cost Based Pricing
• Cost-based approach to pricing combines a calculation of
costs with a target profit margin to arrive at a target price
Target Price
$1.50 / unit
Profit margin
$0.50 / unit
Costs
$1 / unit
Pag

4. Cost Based Pricing
• What happens if production costs decrease?
• What if some customers will pay more?
• What if sale volume is less than expected?

5. Cost-based Pricing - Example
Total Cost Unit Cost
Direct Variable Costs $10,000,000 $10.00
Direct Fixed Costs $20,000,000 $20.00
Administrative Overhead $5,000,000 $5.00
Full Cost $35,000,000 $35.00 14%
Revenue $40,000,000 $40.00

6. Cost-based Pricing - Example
+10% -10%
$40 $40
Which price change is best?

7. Incremental Marginal Analysis
Price / Volume Relationship
30%
20%
10%
Price Change (%)
0% 17% 50%
-30% -20% -10% 0% 10% 20% 30% 40% 50%
-10%
-20% Legend
30% CM
-30% 70% CM
Breakeven Sales Change (%)

8. Traditional Approaches for Pricing
Based
Approach Upside Downside
on
Cost-plus Costs • Focus on profit • Ignores market factors
• Ignores customer value
• Costs can and will change
Market-based Competition • Reality of the market place • Customers will promote
competition

9. What price are you willing to pay?
$100
Lower
Sales
Customer
Rep $75
Lower
$50
Lower

10. What price wins more market share?
Profit
Market share

11. Understanding Price Competition

12. Understanding Price Competition
Firm
Pricing Strategy
& Execution
Intensity of
Firm
Competitive
Profitability
Rivalry
Industry
Health
Source: Competitive Strategy, Michael Porter, 1980, Free Press

13. Market Based Pricing
• Price competition is a negative sum game.
• Competing on value is a positive sum game.

14. Traditional Approaches for Pricing
Based
Approach Upside Downside
on
Cost-plus Costs • Focus on profit • Ignores market factors
• Ignores customer value
• Costs can and will change
Market-based Competition • Reality of the market place • Customers will promote
competition
Value-based Customers • Higher prices for customers • Difficult / expensive to identify
who get more value • Difficult to implement
• Lower prices for low value
customers can expand
market size / revenue

15. Understanding Customer Value
Economic Value Non-Economic Value Other Types
 Quantifiable in  Characterized in  Societal – benefits /
financial terms psychological terms cost reductions for a
• Increased revenue • Higher confidence population
• Decreased costs • Fewer hassles  Clinical value –
• Increased margin • More prestige improvements in care
or price level process
 Potential value –
enhanced opportunity
for value creation

16. Elements of B2B Customer Value
Economic Value
Negative
Negative Competitor’s
Differentiation
Differentiation unique value
Your unique
value
Positive
Positive Value
Value delivery  Customer perspective
Differentiation
Differentiation
delivery
Value
Value  Defined on relative basis
 Depicted in economic terms
Total Economic
Value
Price of Next
Best Competitive
Competitive
 Different value for different
Competitive
Alternative
Reference
Reference customers
Source: The Strategy and Tactics of Pricing, Nagle and Hogan, 4th edition, Prentice Hall

17. What influences the customer’s
willingness to pay?
Their perception of value

18. Maintain Relationship between Price and Value
High Price High Price
P1 Offer1
Offer 2
Offer 3
P2
Low Price Low Price
Low Value High Value Low Value High Value

19. Pricing Process
• What are some pricing processes in your
business?

20. Pricing Process – a more comprehensive view
Price Price Transaction
Setting Realization Profitability
Product Market Negotiated On Invoice Promotions Product
Cost to Serve
Pricing Pricing Subtractors Cost to Serve & Rebates Cost

21. Pricing Process – a more comprehensive view
Price Price Transaction
Setting Realization Profitability
Product Market Negotiated On Invoice Promotions Product
Cost to Serve
Pricing Pricing Subtractors Cost to Serve & Rebates Cost
Net Invoice Price
Customer Price
Invoice Price
Pocket Margin
Pocket Price
Market Price
Base Price
List Price

22. Price Waterfall – Industrial Manufacturer
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$-

23. Price Waterfall – Chemical Manufacturer
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$-

24. Terms for Pricers
• Pocket Price
– The net price for a transaction after
all on-invoice and off-invoice
deductions, promotions, and rebates
etc. are deducted.
– A relative measure of price
performance
• Pocket Margin
– Calculated by subtracting the total
direct costs (direct material, direct
labor) and any transaction related
costs from the pocket price.
– A comprehensive measure of
transaction attractiveness

25. Price Waterfall – Better Insight
Green Co. Blue Co.
$100
$80
Invoice Price
Invoice Price

26. Customer Price
$80
Freight Charge
Invoice Price
$100
Freight Cost
Pocket Price
$70
Green Co.’s Waterfall
Customer Price
$80
Price Waterfall – Better Insight
Freight Charge
Invoice Price
$80
Freight Cost
Blue Co.’s Waterfall
Pocket Price
$80

27. Page 27
Customer Price
Freight Charge
Invoice Price
Volume Rebate
Net Invoice Price
Freight Cost
Green Co.’s Waterfall
Pocket Price
Price Waterfall – Better Insight
Customer Price
Volume Rebate
Net Price
Freight Cost
Freight
Blue Co.’s Waterfall
Charge
Pocket Price

28. Pricing Processes Span the Organization
President
BU General
R&D Finance Marketing Sales Operations
Manager

29. Price Waterfall
• You can’t improve what you can’t measure
• Better insight for more informed decision
making
• A robust source of information on pricing
• Is bigger better for price waterfalls?
• Start simple, capture improvements, increase
sophistication

30. Two Challenges
• Translating better insight into performance
• Working in a difficult environment

31. Tools of the Trade
• Policies
• Approval
• Guidance

32. The Spend Management Agenda
• Assure reliable supply
• Negotiate lowest price
• Rationalize suppliers
• Source low cost-country producers
• Eliminate design cost and lead times
• Drive internal compliance

33. What is the Right Model for the Organization?
Centralized Decentralized
Response vs. Control
Elements of each model are required for optimal business
performance

34. Resources to Learn More about Pricing
• There are a number of good books on the subject
– Pricing and Profitability Management: A Practical Guide for Business
Leaders
– Contextual Pricing
– The Strategy and Tactics of Pricing
• Professional Pricing Society
– Conferences and workshops
• Vendavo University OnDemand

35. THANK YOU