February 22, 2018
I was in a Board meeting last week (not Return Path’s), when one of my fellow directors came out with this gem: “No one will ever thank us for keeping our prices low.”
When I first heard this, as is the case with most great quotes, I was drawn to its wit and simplicity.
But then I started thinking – is it true? My mind first went to retail. Having a reputation as being a low-cost provider can be in and of itself effective marketing – if that reputation is strong enough and your selection is wide enough, at least in retail-oriented industries, customers may consistently buy from you even if you’re not ALWAYS the low-cost provider. Wal-Mart and Amazon prove this one out every day. That’s the economic equivalent of customers thanking you for keeping your prices low. Or pick an even more extreme example – gas stations, where there’s even more limited brand loyalty and even more product commoditization. There’s really no reason to buy gas from a station who charges more than a couple pennies more per gallon than its neighbor. No, thank you.
But in a B2B environment with smaller numbers of customers and smaller numbers of SKUs, this comment makes a lot more sense. IT or Marketing departments don’t exactly go to the grocery store twice a week to buy data or software solutions! I’m a big believer in the diminishing differences between the B2C and B2B universes, but this area may be one where the difference is still sharp.
Low prices might lure prospects to your doorstep, but they’re not going to keep buying your product if it’s not of sufficiently high quality. Buyers measure quality in different ways, but here are three frameworks to think about as you contemplate the quality of your solutions relative to their prices:
- Is the quality of your product “above the bar”? Meaning, does it work well enough to get the job done that customers are hiring you to do? If not, you do not have a sustainable business. If so, see the next two questions
- Is the value of your product strong enough relative to the price you charge? Value-based pricing is increasingly difficult in an era of hyper competition, but if you can offer tailored enough solutions by vertical or of course by client, you can really optimize your pricing model
- Is your price/value equation strong enough relative to the price/value equation of a competing solution? Sometimes a “just barely good enough” solution can beat out a superior solution as long as it’s a LOT cheaper and the job the client needs done isn’t mission critical
The final thought vector in this equation is friction. Go back to the consumer examples above – your switching cost to buy gas at Station A one week and Station B the next week is zero. But in a B2B environment, there’s always at least some friction around switching products. Friction could be implementation cost, time, execution risk. It could be employee or customer training. It could be integration with other systems or workflows. It could even be desire to maintain a halo effect from doing business with you. The more friction you have with your product, the easier it is to maintain higher pricing.
So my conclusion is that high prices are rarely going to chase someone away in a B2B, low client count/low SKU/moderate friction environment. And that means my fellow director was spot-on: no one will ever thank you for keeping your prices low. All in, this comment was a great reminder for any B2B organization about how to think strategically about pricing.