To Stay Competitive Amid Digital Disruption, B2B Companies Need to Embrace Dynamic Pricing
Digital advances have transformed shoppers’ habits in dozens of industries. Now it is B2B’s turn to be disrupted. Online channels are becoming far more important in a range of sectors, from chemicals to industrial machinery, amplifying competition. In fact, McKinsey’s analysis shows that only 15 percent of B2B buyers find it helpful to speak with a sales rep when making a repeat purchase of an identical product. Meanwhile, as procurement teams gain access to more data, including prices across competing suppliers, they’re becoming more sophisticated and demanding.
As the rules change in this high-stakes game, leading B2B companies are learning to tap rich troves of data and harness powerful new analytical tools to adjust prices to meet volume and profitability targets, become more competitive, go to market faster, and tailor their offerings more closely to customers’ needs.
Everyone knows new analytical tools and fresh data can be valuable, but they’re not enough. To succeed with dynamic pricing, B2B companies need to include salespeople’s input into algorithms from the beginning and adopt new processes and mind-sets from the sales team to the C-suite. Changes like these take time and effort, but the payoff can be substantial.
Moving to a World of Dynamic Pricing
Until recently, few B2B companies had systematically collected and organized enough data on deals to pursue dynamic pricing. Even now, few have the mountains of real-time pricing or behavioral data available to major retailers, airlines, and other companies that make millions of sales a year. But B2B leaders are tapping into internal and external databases and other online sources to understand target segments, competitors, price boundaries, and the details of previous deals.
And with new data in hand, leading companies are using advanced analytics to manage growing complexity and act more quickly in today’s more competitive marketplaces.
One of the main challenges when leveraging advanced analytics is choosing the right approach, which reflects both an overarching corporate strategy as well as more granular strategies for sub-groups of products. Each of these strategies may require a different analytic approach to pricing—e.g., some parts may require a value pricing approach leveraging market insights, while others can be priced leveraging statistical clustering methodologies. The art of successfully applying this lies in combining different methodologies in one single pricing model.
This new ability to weigh a wider range of factors and consider multiple scenarios quickly is allowing leading companies to price strategically and dynamically. In addition to raising the value of their existing portfolios, they’re building data sets and frameworks they need to improve their overall pattern recognition and flexibility—which will confer lasting competitive advantages. They’re also systemizing pricing processes to reduce repetitive manual work and streamline reviews.
To make the most of large datasets and number-crunching capabilities, companies need to update systems and IT structures in ways that support dynamic pricing engines and cloud-based pricing tools. This helps them draw the right insights more quickly, adjust prices, and push them to the front line. Success also requires integrating new tools into the overall technology frame and making them user-friendly—after all, new methods are useful only if the sales team uses them.
Salespeople’s Commitment Is Needed
Many salespeople may believe lower prices mean more deals, so they may resist price hikes that could lower volume. And the most successful salespeople have reached the top without advanced data analytics, so they may resist changing how they tailor and segment prices, update and use new information, and negotiate with customers.
It’s essential to ensure that salespeople are on board with dynamic pricing. To support this, incorporate sales teams’ knowledge into the design from the beginning, and demonstrate that dynamic pricing doesn’t mean increasing prices across the board: Some may rise, others will fall, and others will remain flat, depending upon the situation. It’s also critical to remember that salespeople’s expertise is still crucial—the software offers suggestions, along with the rationale for each price, which can help teams prepare for negotiations and ultimately be more successful.
Seize the Opportunity
Most B2B companies should at least be thinking about pricing analytics now, bringing in the talent and technology needed to make that happen. Powerful secular trends, including customer sophistication and pricing transparency, will only accelerate. Companies that already offer their products online can begin testing new pricing approaches in just a few weeks and see significant impact in six to nine months. Seize the opportunity to take the lead on your competitors, or risk getting left behind.
Nicolas Magnette is a senior solution leader and associate partner for B2B pricing solutions for Periscope® By McKinsey. Magnette joined Periscope® in 2011 and has since supported more than 50 commercial transformation programs for B2B clients, mainly in chemicals, industrial equipment, and manufacturing. His focus has been on advanced analytics and the deployment of commercial and pricing performance management systems. Magnette has a passion for designing efficient and user-friendly products and has pioneered many of the innovations in Periscope. Before joining Periscope® By McKinsey, Magnette was a generalist consultant at McKinsey in Luxembourg and in South Africa, serving clients in Europe and Africa on strategy, commercial, and operational issues.