As soon as you get the go-ahead, you return to the same website and click the same flight, only to see that the price has skyrocketed. This is dynamic pricing in action.
As B2B sellers, we don’t want to make our clients as upset as this example might make you, but there is still lots of space for dynamic pricing to pop up in our operations.
To help us understand where that delicate balance lies, Luca Minniti from Konecranes spoke at our recent Manufacturing Pricing Excellence 2023.
What is Dynamic Pricing?
At its core, dynamic pricing is a fast-spreading strategy to change prices automatically upon market conditions. It can be affected by many factors, including
- Sourcing Cost
- Production Cost
- Competitor’s Average Price
- Customer Demand
- Minimum Margin
- Availability in the Market
- Ease for Customer
The goal of this pricing structure is simple: to offer the best price at any given moment in time. Your best price is going to be a balance between profitability and competitiveness.
How Dynamic Pricing Works
Traditionally, this model has been most effective in the B2C market. As mentioned previously, it’s often utilized by airline companies, but that’s not the only place it can be found. Modern dynamic pricing pops up in
- Clothing Stores
- Taxi Companies
- Gas Stations
With dynamic pricing’s prevalence, it’s hard to imagine all these companies changing prices manually every time there’s a flux in the market. That’s why they use an algorithm to automatically adjust prices based on market criteria.
To set up this kind of algorithm, a company must establish
- Web Intelligence – You need to be constantly monitoring your competitors’ prices to stay relevant in the market
- Numerical Parameters – Final prices will be decided by the factors you choose to track and the ranges you deem acceptable
Exactly what data you collect and how it will affect the final price is up to you.
Dynamic Pricing in B2B
While it’s clear how and why dynamic pricing works when selling directly to the consumer, how can this process be applied to the B2B and spare parts markets? Is it too challenging to implement, or an opportunity for growth?
Several factors make dynamic pricing a difficult sell for these companies.
Historically, B2B prices change once or twice a year. They may change every quarter, but generally, buyers expect the same prices to be valid in the long term.
When selling to businesses, the buyer you’re in contact with will typically have their own specific targets and KPIs to achieve. They are going to come in with less flexibility than an everyday consumer and know exactly what prices are acceptable for their business operations throughout the full year.
With all of these factors stacked against it, it can seem impossible to successfully introduce dynamic pricing to your B2B company. However, this is only part of the story.
Let’s zoom in on a company that sells B2B spare parts. Generally, these businesses have the potential to bring in high revenue and profit, sometimes more than new product sales. However, three main difficulties can arise.
- Steep Competition
- Variating Costs of Production (raw materials, supply chain issues, sourcing, energy, logistical challenges)
- Availability of Stock
If any B2B company was able to automatically adjust prices based on a combination of all these factors, they would be far more competitive, profitable, and effective.
Dealing With Customer Pushback
One of the biggest reasons why this strategy hasn’t been adopted in the B2B market is the fear of customer pushback. If prices are constantly changing, clients are likely to resist.
However, if you take a step back and look at the full picture, you see that customers are going to have the same resistance if they see your competitor offering a better price than you. This process avoids that and ensures you are always giving your customers the best deal, fostering brand loyalty in the long term.
Making this change will require a certain level of re-training your customers. They are used to signing a deal with a successful supplier who can offer fixed prices. It’s been their way of working for a long time, and this system works against that status quo.
When you can proactively show them how buying from your webshop will save them money in the long run, they are far more likely to be willing to make the shift. Your online store will always offer more competitive prices with dynamic pricing based on market conditions and availability.
This competitive and profitable price is found by creating a balance between your own cost, your competitor’s prices, and customer demand.
Global Trends in B2B Dynamic Pricing
If we take a look at what businesses experienced internationally over the last five years, we can see another strong case for why dynamic pricing is so valuable for B2B manufacturers.
Recently, we as a society have faced increased
- Geopolitical Instabilities
- Variations in Import and Export Taxation
- Incapability of Central Banks to Predict Financial Crisis
- Instability of Currencies
- Unpredictability of Economies and Inflation
All of this instability has caused a huge upturn in cost variations for both B2C and B2B companies. Everything from raw materials to supply chains to energy is in flux, a problem that can be solved by adopting dynamic pricing.
When you take the time to implement a pricing model with multiple price points, you can stay stable in times of instability. This can keep your revenue stable, while still responding to the needs of the market.
The ultimate question facing B2B manufacturers at the moment is not, in fact, is dynamic pricing a challenge or an opportunity. What businesses need to decide is if they want to turn this tactic into a challenge or an opportunity.
Is profit stability, competitive prices, and resilience worth the hard work of setting up automation and parameters? Is it worth the time and effort of training your clients to see the value in shifting price points?
The answer will be different for every company, but Minniti argues that the sooner your business moves forward with dynamic pricing, the sooner you will be prepared to face the challenges of our modern market.