When you sell a product or service to another business, you meet various challenges. One of the first will be pricing. It may be tempting to dip down to a bargain-basement price just to secure the deal, but when this is done, you often devalue your product or service. Fortunately, there are various pricing models out there designed to give business owners a guideline to work with. In this article, we will look at B2B pricing and review several pricing models and strategies, outlining the pros and cons of each to help you determine which works best for your situation.
B2B pricing – what is it?
Before we look at different pricing models, let’s first look at what B2B pricing is. Business to business (B2B) pricing is the cost of services or products one business sells to another. It is just as basic as that. B2B differs from other retail operations simply because the items sold are not offered to consumers. An example of B2B sales would be a company that manufactures office furniture and sells it directly to businesses needing office furniture.
B2B pricing
There are several pricing models. Pranjal Bora with Digital Authority Partners says a pricing model is a framework that your pricing strategy is structured to follow. It dictates what your business will charge other businesses to purchase your services or products. There are four basic pricing models. They include user-based, usage-based, tiered, and flat-rate pricing.
User-based pricing
A user-based pricing model is one where the price you charge is based on the number of users with access to the product or service you sell. This means that the cost is greater for more users.
Benefits of user-based pricing
User-based pricing is a simple, uncomplicated method of selling. This makes it easy for buyers to understand before they purchase if budgetary concerns are required.
Disadvantages of user-based pricing
Businesses can sidestep higher costs by having a single access code but sharing it with many other users.
Usage-based pricing
The usage-based pricing model comes from how much a business uses your product or service. The more they use it, the more it costs.
Benefits of usage-based pricing
For purchasing businesses, this method of pricing allows them to project costs. It also means that seasonal use will increase your revenue.
Disadvantages of usage-based pricing
As pricing will vary monthly, it may become problematic for some businesses. This may be difficult for some to budget for properly arranging it.
Tiered pricing
This is pricing at different levels. The cost comes from the number and type of features included at each level, with less costing the least.
Benefits of tiered pricing
This method of product pricing gives businesses options to choose from that best fit their needs. It also provides a tool for upselling tiers based on additional feature availability.
Disadvantages of tiered pricing
The main challenge in this pricing method is deciding which features to group on each level. This may deter potential customers in need of a combination of features.
Flat rate pricing
As the term implies, this is a pricing method where all available features are in one bundle with a single price.
Benefits of flat-rate pricing
This simple pricing model results in predictable costs for companies that purchase your products or services.
Disadvantages of flat-rate pricing
Selling to companies that rely on several users having access to what you sell may result in a loss of revenue to you where a user-based pricing model would fit best.
Pricing strategies to consider
A pricing strategy is a method you would employ to help establish the price points and final cost of what you are selling to other businesses. Four main strategies include value-based pricing, cost-plus pricing, competitor-based pricing, and dynamic pricing.
Value-based pricing
This pricing strategy comes from what you think businesses will pay for your products or services based on your understanding of what they need and are willing to pay.
Benefits of value-based pricing
This is a strategy that keeps you very competitive within your industry as you price according to who your customer is.
Disadvantages of value-based pricing
You must have a comprehensive understanding of your target audience, and this is time-consuming to get right.
Cost-plus pricing
Two factors determine cost-plus pricing. They are the existing demands from your customers and the pricing already in place from your competition.
Benefits of cost-plus pricing
This is easy to develop and explain, so customers understand what factors help calculate your prices.
Disadvantages of cost-plus pricing
It is easy to overprice and miss sales opportunities. Plus, profit loss exists if the value is greater than the cost of production.
Competitor-based pricing
Competitor-based pricing comes from the current market rates, and you use that benchmark to price your goods higher or lower to remain competitive.
Benefits of competitor-based pricing
It is easy to formulate with a bit of research and helps consumers understand the current pricing. Plus, if the market base price changes, you can adjust yours accordingly.
Disadvantages of competitor-based pricing
Production costs are not part of the formula, which may impact profits. Plus, if your products become popular, you risk losing revenue from raising prices as demand increases.
Dynamic pricing
Your pricing depends on the size of the business you sell to and where they operate.
Benefits of dynamic pricing
This method permits a great deal of flexibility, where prices can change related to various factors ranging from competition to market conditions and more.
Disadvantages of dynamic pricing
Price fluctuations in response to market conditions may push some customers away.
Final thoughts
There is a lot to remember when determining the pricing of products or services you sell to other businesses. They require two main components: the pricing model and the pricing strategy. By using both of these in B2B pricing, you should see great success compared to businesses that do not follow such pricing methods.
