Dynamic pricing models can help optimize prices in e-commerce and other industries.
Floor Prices in B2B
Insights on how to use Floor Prices and Target Prices when selling to other businesses.
In business relations it is very much the norm that a variety of discounts or rebates are given to customers, which leads to that many customers have different pocket prices, or net net prices, after all those discounts. This is in itself a good thing, as it means that suppliers can differentiate discounting and final price paid, based on customer value and performance.
The challenges come when these differences in net net prices lead to other issues, e.g.
- The existence of plethora of discount types often leads to "profit leakage" where the sales people offer too many discounts to too many, or at least the wrong, customers. This is where Revenue Control comes in handy, to get a proper approval flow going.
- Customers compare pocket prices and then shop around / push your sales team to give better conditions because someone else is enjoying favourable net prices.
- Price increases are sometimes difficult to get through because any top line increase is discounted back by sales people who receive bonuses on revenue rather than pocket price or profitability.
- When net net prices differ across borders, international customers compare prices across borders and engage in buying cheaply in one country and selling at a higher price elsewhere, so-called "grey markets" or "parallel trade".
For these reasons, and probably many more, companies engage in establishing "Floor Prices", i.e. a pocket price that sales people are not allowed to go below, at least not without some exceptional approval.
Sometimes, B2B pricing managers establish both a Floor and a maximum ceiling, and allow sales people / local markets to operate within that corridor. Benefits of operating such a system include:
- It is easier to drive price increases through internally, as it is the Floor Price that is increased in internal communication, even if it may be the top-line list price that externally gets raised
- Price comparisons by international customers may still show differences but even if they engage in parallel trade, the minimum Floor Price is secured in all markets. No market is "dumping" their prices only to sell to international traders.
- It is a good communication tool to discuss internally about product or customer profitability.
But there are also some challenges, including in some cases that sales people, if they are told that everything is OK as long as they stay above Floor Price, then they sometimes might feel incouraged to take the prices down as much as possible, through additional discounting, effectively causing a pocket price decrease. A key tool to counter this is to establish both a Floor Price and a higher Target Price, maybe differentiated by channel/objective customer characteristics, etc. If the sales person must perform against also the Target Price, he cannot take the pocket price down to the Floor, at least not without losing performance bonus.
Stratinis Pricing Suite has built-in functionality for managing both simple and complex floor price systems. Speak with us and learn more about floor price management can help your business.