Of all marketing mix elements, price seems to generate the most anxiety among small business people. I’ve had a number of conversations about pricing with my fellow service providers and I raised my prices in September: what a perfect time to take a look at pricing of business-to-business services. After an overview of B2B service pricing models, I’ll explore price discrimination – charging different prices to different customers based on various factors (with a bias toward marketing and consulting). Tomorrow I’ll offer a position on nonprofit pricing.
First I want to make one thing clear. Not only is it okay to make money, it’s even better to make a lot of money. What matters is not quantity, but why you’re in business, how you make that money and what you do with it. That’s why you’re a sustainable business adhering to the triple bottom line, right?
Pricing business-to-business services
Your pricing should 1) integrate with the rest of your marketing mix and 2) satisfy your client’s needs. Having said that, you can price your business-to-business service in a number of ways (the list is from Guerrilla Marketing for Consultants):
- Hourly rate or fee-for-service. The billable hour still reigns in B2B services. As any pay-as-you-go service, it’s easy to understand and track. The longer the project, the more you make. Hourly rates are also easily used to compare competitors and negotiate down. Worse, the hourly rate bears no relation to the outcome of your service, which is what you’re hired for.
- Fixed fee or price-per-project combines your hourly rate with the anticipated time for the project. It offers a predictable revenue, but you get paid the same no matter how long the project actually takes.
- Contingency pricing brings in a percentage of the project result, e.g. increased revenue or reduced cost. This success-based pricing can be very motivating – the better the result the more you make. But, if your efforts fall short, you can make little or nothing.
- Value-based pricing. Your fee depends on the value it generates. This model is potentially the most profitable for B2B services, and it seems the marketing industry is moving in this direction. However, with value being highly subjective, it’s tough to estimate and measure.
- Retainer. You can charge a set amount for a set number of hours, or charge a fixed fee for a fixed fee. Retainers are best suited for advisory services rather than projects – you’re charging for availability.
- Equity-based pricing. You get paid with stock or stock options instead of cash. This pricing is most common among startups.
Combinations of these pricing models can yield their benefits and eliminate their risks. For example, you can combine a fixed fee with a contingency bonus, a prepaid-service retainer with fee-for-service, or charge differently for different services or project phases. For the right client, you can also trade for products or services. Possibilities abound in composite pricing – do your research and opt for the combination that works best for you and your client.
With my company, Semiosis Communications, a sustainable marketing consultancy, I usually combine my basic hourly rate with an estimated price per project, while leaving some flexibility to ensure delivery of project deliverables. For a few months now I’ve been offering a variation of the pay-what-you-want method: every invoice comes with a satisfaction guarantee, where the client is free to pay either the billed amount or any other amount they deem adequate to the service and benefit provided. (I have yet to see a client pay less than the billed amount.) I’m also exploring value-based pricing, though that’s a long-term project.
Price discrimination in B2B services
Price discrimination refers to charging a different price for the same service depending on circumstances. It aims to take advantage of the consumer surplus – the difference between what the consumer is willing to pay and what she actually pays.
While price discrimination may seem to render your pricing unpredictable to clients, it allows tailoring the price to each client’s specific needs. Note I’m talking about both lowering (discounting) and raising prices.
As a B2B service provider, first consider the triad of speed, quality, and price. In the fast-good-cheap pricing method, you can only maximize two at a time: delivering a high-quality result fast will be expensive; delivering high quality at a low price will be slow; and delivering fast at a low price will likely be lower quality.
Next consider these factors to decide whether to charge different prices:
- Time. You can offer seasonal or cyclical prices depending on the time of year – for example, charge less when businesses is slow to attract business; charge more when you’re busy to move projects around your priority list. You can offer special pricing around events and observances. You can offer limited-time-only prices.
- Location. A B2B service is not necessarily tied to a location. You can still charge a different price if you have to travel over a certain distance to your client’s location (charging for travel time or mileage falls under this category). You can charge differently for face-to-face and phone/email service delivery.
- Quantity. Similar to bulk discounts, you can offer different prices for smaller projects and for ongoing projects, repeat business, or long-term clients. Teaser or incentive pricing also falls into this category; you can offer a lower initial price to lure a client in, or you can offer to lower your price after performing a certain amount of services.
- Customer. This entails charging a different price to different clients based on their type (segment) or willingness or ability to pay. A common method is charging differently to for-profit corporations and to nonprofits (more on that in tomorrow’s post). A bigger organization means more complex projects, so you can charge by business size – revenue, market capitalization, employee count, etc. You can also differentiate by industry, stage of development, or other characteristics.
The pricing for Semiosis Communications consulting services varies by business size, and I also have a special, lower price for startups and microenterpreneurs.
How do you price your business-to-business services? What examples of price discrimination have you implemented or encountered?
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Image credit: mag3737
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Great post. I’m pleased to see the discussion of price discrimination because that is the only way to truly maximize one’s profits. If you can charge each customer exactly what they’ve reserved to pay (and no more), you can extract all the surplus from the market. The only thing I’ll add is that discrimination only works if you can do two more things: Properly segment the market and identify the buyer’s reservation price (by any of your methods in the top half of the post) and then seal the market to prevent reselling. Certainly, this type of pricing is very hard to implement. A more reasonable way to attack it is by charging groups different prices, instead of people, because they’re easier to segment and seal.
A couple of other pricing options to consider for B2B are two-part tariffs (charging an entrance fee plus a use fee) and bundling. Both are useful for extracting profits in B2B or B2C.
Again, nice post as always.
@Matt: Thanks! To price right and fairly, knowing your target market is a must, indeed, though there’s only so much that you can discover about the price your prospects are willing to pay. The best way to seal the market is to consistently (over)deliver on your promise and produce at least the agreed-upon results.
How is value highly subjective? The key to value-based fees is to put the onus on the client for determining objectives, measures of success, and value.
@Mark: The issue with value is that measurables are only one element of it. Consider the difference between price and value. You can measure price, but it is the buyer who assigns value to the overall product, with price being only one consideration.
So you’re right, the client should determine value, but the client does so based on her subjective considerations. Otherwise, it would be easier to determine the price in dollars as an hourly rate or contingency.
Quoting Jay Conrad Levinson, “Value-based pricing has been slow to gain acceptance in the consulting business because of difficulties in agreeing on estimates of value and finding methods to measure it.”