How to develop your pricing strategy

What you need to know and where to start. 

The success of your business hinges on how you price your proposition. Too high, and you will have no customers, too low, and you will have no profits. Either way, your business will have no future. 

But how do you know what your product, service or solution is worth?

Many organisations adopt a time and materials (T&M) approach, while others price according to what the market will bear. Neither is wrong. In practice, an effective pricing strategy begins with understanding exactly what it is you do, then working out how much it costs you to deliver and understanding customer needs and expectations alongside how your competitors price and position their offering.

Start by understanding what you are selling 

This may sound obvious, but fully understanding your proposition is a key element of the pricing process. If you have not included all the elements of your solution in your costs, you could set an unprofitable price from the outset. Similarly, not including a key element of your solution when comparing your pricing with competitors could mean clients choose your competitors every time.   
 
For example, let’s say your proposition is copywriting. There are multiple elements to copywriting, not just the actual writing, as our whitepaper How much does copywriting cost? explains. 

Alongside the writing, there is the briefing and desk research and possibly multiple interviews. Are amends included and is proofreading included? If the client decides you need to interview five internal experts at half an hour per interview, and you have to organise them, suddenly that’s an extra ten hours, or entire day, added to the process. 

Did you factor that into your pricing? 

When specifying your copywriting solution to the customer, have you included two sets of reasonable amends and proofreading throughout? We do, but most other content agencies and freelancers don’t. That means Copestone often looks expensive by comparison when a client is gathering early copywriting quotes for a project. 

So, in the marketplace our prices look expensive. But when you factor in all the elements of our proposition, they are not. We highlight that reasonable amends and proofreading are inclusive in our quotes when we provide proposals, so address the market comparison challenge in that way.

The time and materials (T&M) pricing strategy 

A time and materials strategy should underpin your pricing strategy unless you are specifically adopting a loss-leader strategy. Whatever your final pricing for your product, service and solution, it should always be more than what it costs to deliver. If you’re in a larger organisation, you will have colleagues in finance and operations who will assist you with scoping and determining the exact cost of your proposition. This can be quite complex – there are entire MBA management accounting modules devoted to this exercise, so use this support if it’s available. 

If your organisation is smaller, or siloed, and you don’t have that support, external assistance is valuable, or devote sufficient time so you fully understand the process steps involved in delivering your proposition. This includes understanding the direct and indirect costs internally and from your supply chain, plus overheads, and ‘hidden’ costs, such as your time and the marketing and sales costs, plus downstream discounts to distributors and resellers – they are a cost, too. 

If you trade outside of your home currency zone, then remember to hedge for exchange rates – exchange rate futures have a cost, which is something your finance team can explain and cost.

Identify what your proposition costs per ‘unit’. This may be by product, by components making up a produce, by process if your proposition is, for example, powder coating, square metre or hour – whatever your marketplace uses and expects from you as a supplier. Estimating is fine, as long as it’s underpinned by sound and data-based assumptions. In practice, you will have multiple ‘units’ and set a minimum price for each one so that your pricing never takes you into a loss.

Loss leader pricing strategies in B2B

A note about loss leaders. This is, for example, when a supermarket charges below cost for milk and bread so that you choose to shop there, and so buy many more profitable products as part of the same transaction. The loss on the bread and milk are compensated by your spend on more profitable products, so the overall transaction reaches the target level of profitability.

Beware of a loss leader strategy in B2B. Firstly, your loss leader may be the only solution your client buys, leaving you in a permanent loss-making position. Secondly, solutions offered as loss leaders are typically commoditised, and not highly valued.

Unless you are, for example, a components supplier with a large, low-cost production operation and compete on a cost leadership basis, offering commodities is not good for your brand. You can’t differentiate your proposition in any way except by being cheaper. That usually becomes a downward spiral where the supplier with the deepest pockets and largest economies of scale wins because their competitors (you) run out of money.

Pricing to market – what will the market bear?  

In parallel with identifying your T&M, you should be looking at your market and competitors. Unless your business and what it offers is brand new, there will be plenty to work with, either from within your organisation or by market researching customers and competitors. This is where fully understanding what you offer is essential, because without that knowledge you don’t know what market you are in and who your customers and competitors are.

If you sell via a complex supply chain, you may be divorced from your end users. Sometimes stakeholders in the supply chain do this deliberately to maintain artificially low pricing with you, hiking prices for the final customer. That’s not wrong, it’s just business, but by being aware of the entire supply chain and the various actors involved, you can make sure you are pricing to market.  

Having determined the T&M costs for your proposition and simply adding a margin, then discovering you’re twice as expensive as your competitors won’t gain you many sales, unless what you offer is clearly superior to competing propositions and your clients value these additional benefits. In fact, if your proposition is so superior to your competitors that you can justify a huge price increase, you might want to check you are comparing yourself with the right competition and your brand is positioned correctly.  

Find out how prices vary in your market, what your competitors offer and how their proposition and its benefits compares with yours. You should already understand what benefits your market values so you can work out how to position your proposition against your competitors, and with pricing data, set a price that positions you appropriately and with sufficient profitability. 

Don’t overprice, charging more than the market will bear. Equally, don’t under-price as your customers might think there’s something inferior about your proposition.   
  
Some brands don’t consider themselves to be in competition with anyone. If you’re the only supplier of something, it is regulators you need to worry about, not competitors, and they can be nastier. But don’t fall into the trap of thinking you are the only game in town. There are always choices. Even if you are in a market dominant position with huge brand equity, profit take but don’t give your customers a reason to choose differently.

So what should I use, T&M or price to market? 

The reality of pricing most B2B propositions is understanding all the above – your proposition, costs, competitor proposition and costs, and what your customers are prepared to pay in exchange for the benefits and value your proposition delivers. The KISS – keep it simple stupid – principle applies here to a point, but most B2B propositions are complex, and there’s nothing wrong with that, as long as you’ve done your homework. GIGO – garbage in garbage out – also works here. Set prices based on poor information and judgement, and you’ll eventually go out of business.

But offer your customers a compelling proposition matched to their needs that enables them to sleep at night, will see your business grow.

Do you need help understanding your proposition, your market and target personas, your competitors and developing a pricing strategy that wins and keeps your customers?  

Contact us to learn how we can support you to develop your pricing strategy based on sound data and assumptions that will deliver your marketing and sales – and profitability – objectives. 

If you need support to write engaging, audience-driven content for your B2B brand or agency, contact Copestone today.