One of the most common practices in the B2B pricing world is increasing list prices every year. In truth, pricing directors should cringe when they hear this: “We increase our list price 5% every year.”
What’s so bad about these blanket increases? If list price customers only make up a small percent of your total revenue, does this really affect your bottom line?
Simply put: yes.
List prices trickle down to all customers, as comparison benchmarks against all Special Price Agreements – or SPAs as they’re commonly known. If list prices are set too low relative to market conditions, the associated SPA discount will decrease. Good luck trying to move a customer who’s been getting a 30% discount for years to a 25% discount.
By contrast, if list prices are set too high, the market will push back, resulting in runaway discounts – higher discounts that can compound over time. This can get out of control. When you hear statements like “our average customer discount is 75%,” it suggests that list prices are set too high, and opportunity has been lost.
For businesses where list price customers make up a more substantial portion of revenue, the failure to incorporate general market conditions into list prices will result in lost opportunity – loss of revenue when list prices are too low and more list price customers negotiating SPAs when list prices are too high. These customers are commonly known as “jumpers.”
When was the last time you heard of an SPA with a 3% discount? When a customer jumps to an SPA, they’re looking for at least a 10% discount.
In the pricing world, the general attitude on setting list prices can be summed up with this knee-slapper:
“Why did the pricing manager cross the road? Because his boss asked him to set list prices.”
List prices have always been seen as an important pricing lever that can impact a company’s performance. The challenge with setting list prices is the number of factors that must be considered. Here are just a few to consider:
-Will these prices meet my revenue goals? -Are these prices consistent with market trends? -How do these prices interact with my SPAs andor matrix prices? -How can I leverage my transactions if my list prices change only once a year?
Each one of these questions on its own is difficult. Collectively, they’re enough to make a pricing manager throw his hands up and cross the road.
So how do you keep your pricing manager from going to the list price mad house? Three words: technology + data + science. It starts with using the wealth of information in your data and applying sophisticated scientific algorithms that incorporate these factors to produce an optimal price. The delivery of these prices is just as important as the backend computation. Not only does a pricing manager want to see an optimized price, they want to understand it as well.
Interested in finding out more? We’d love to talk to you about not crossing the road to set list prices.