A critical step in getting pricing strategy right for your company is understanding your assumptions and biases when it comes to pricing. Not many people have deep expertise in pricing strategy, but most of us have some understanding of the price/demand curve from economics class. This concept states that in a perfectly competitive and elastic market, when the price goes down, demand increases. This fundamental idea is heavily flawed when applied to B2B markets, especially for highly innovative and differentiated products. In these markets, there is no perfect competition, and the price is not elastic. In addition, often the factors that drive demand for B2B products have nothing to do with the price of that product. The demand for it is determined by some other factor, “see the concept of derived demand”, other than price, such as demand for Electric Vehicles, driving the need for copper.
In the long run, if the price of copper is low, it might allow Electric Vehicle manufacturers to build less expensive cars, but that is a long tail situation, not one in which dropping the price of copper today, will increase demand of copper tomorrow.
So why am I talking about supply and demand in the context of “willingness to pay”?
This concept refers to an individual or company’s “willingness to pay” for a product or service. How much I am “willing to pay” for something, in a B2B context, will depend on a whole host of factors. Let’s identify a few:
- My familiarity with the solution – Do I know that it exists? Do I know what it does? Are there comparable offers out in the market?
- Does an annual budget exist for this solution or will it be a net new expense for my organization?
- My understanding of the value of that solution – how much it will impact my costs, revenue and risk for example, and how directly it ties to my strategic objectives.
- Where I sit in the organization and how much budget I control or how much influence I have.
- How this solution compares to other competitive alternatives or other comparable solutions (so even though they are distinct solutions, how much I pay for my HR software and how I pay for that software should seem similar or comparable to how I pay for my CRM software as they are all vetted by the IT organization as well as finance).
