Information Technology

Digital disruption in B2B sales – why businesses need to adopt dynamic pricing

By Nicolas Magnette, Vice President & Global Sector General Manager, B2B, Periscope By McKinsey
Information Technology
Published: 14 May 2018

B2B sales are on the verge of a revolution. Digital advances are now positively impacting and actively disrupting the world of B2B as online channels are becoming far more important in a range of sectors from chemicals to industrial machinery, amplifying competition.

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. At the same time, radical changes are shaping customers themselves, with buyers being more informed, technically savvy, and comfortable engaging via digital channels. In fact, McKinsey’s analysis shows that only 15% of B2B buyers find it helpful to speak with a sales rep when making a repeat purchase of an identical product.

Everyone knows new analytical tools and fresh data can be valuable, but they’re not enough. Here are the top three dynamic pricing recommendations to help enable B2B companies boost returns-on-sales while improving customer satisfaction.

1. Start with existing data and improve over time
Until recently, few B2B companies had systematically collected and organised enough data on deals to pursue dynamic pricing. Even now, few have the mountains of real-time pricing or behavioural 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.

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. 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.

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.

2. Leverage advanced analytics to interpret the data
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. Advanced analytics can help separate fact from fiction – and gut feelings from actual results. Research can reveal that longtime customers are willing to pay more, for example, and that discounting has little or no effect on win rates.

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.

No one person may be able to master all the details of today’s complex product portfolios, customer segments, regional marketplaces and competitors’ offerings, but advanced analytics can offer rich, fact-based guidance on deal-level pricing and show what the best salesperson would do in each situation. If those recommendations are easy to understand and use in negotiations, they can make each salesperson more effective.

3. Win buy-in from sales teams
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 some 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.

To succeed with dynamic pricing, B2B companies need to include salespeople’s input into algorithms from the beginning and adopt new processes and mindsets from the sales team to the C-suite. Senior leaders need to decide how dynamic pricing will help the company achieve strategic goals – and measure progress carefully. By tracking progress toward specific goals, a company can hone its strategy and tactics and improve its pattern recognition in an increasingly complex world.

Changes like these take time and effort from the CEO and his/her top team, but the payoff can be substantial. Most B2B companies should at least be thinking about pricing analytics now as, with the right combination of approaches and implementation, they can expect to boost returns-on-sales by 4-8% while significantly improving customer satisfaction. Indeed, we’ve seen some companies raise prices by as much as 60% without a significant loss in volume.

About the author
Nicolas Magnette is a senior solution leader and associate partner for the B2B pricing solutions for Periscope® By McKinsey. Nicolas joined Periscope® in 2011 and has since then 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. Nicolas has a passion for designing efficient and user-friendly products and has pioneered many of the innovations in Periscope®. Before joining Periscope® By McKinsey, Nicolas was a generalist consultant at McKinsey, in Luxembourg and in South Africa. Nicolas served clients in Europe and Africa on strategy, commercial, and operational issues.