How B2B Price Elasticity Boosts Revenue
Staying Relevant in a Digital Commerce World
What’s the difference between Bigfoot and price elasticity in the B2B market? One is a myth. Don’t let anyone tell you price elasticity doesn’t exist in the B2B market – let me tell you why and how you can leverage it to stay competitive and grow wallet share.
Since the onset of COVID-19, there has been an explosion in B2B digital selling with McKinsey reporting a 25% growth in eCommerce revenues amongst companies that sell online. And that trend will continue. According to Gartner, by 2025 80% of B2B sales interactions between suppliers and buyers will occur in digital channels.
But whether a business recently expanded into online sales channels like eCommerce or is ramping up the digital infrastructure they already had in place, businesses that succeed in online selling have one thing in common: they are not posting list prices.
Meeting Your Buyers Where They Are
It isn’t unheard of for B2B businesses to use their eCommerce channel as an online catalog, assuming that buyers desiring a “realistic” price would call their sales reps. But never before has the pressure from B2C consumer expectations been as prevalent as it is now in the B2B marketplace. B2C consumers have turned their expectation of market-relevant, transparent prices onto B2B products and services that they can purchase with a click of a button.
Market analysts recognize the power of this B2C consumer demand trend (Hanover shows 70% of B2B buyers have reported that their vendor preferences have changed with the recent acceleration to digital channels) and are advising B2B businesses to meet their buyers where they are. That is, B2B companies need to be ready to engage with their buyers online, over the phone, in person, across chat, or all of the above.
Increasingly, businesses that fail to deliver market-relevant prices are falling behind those that are capturing the opportunity in buyers shifting to digital channels. Buyers who feel their needs are not being met with one vendor are ready to move on to another vendor who can meet their expectations for transparent, relevant pricing. And vendors can do this by leveraging price elasticity.
Price Elasticity: Myth or Munition?
Price elasticity of demand, which is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price, is more often associated with the B2C market. The theory there is when the price of a good is lowered, more consumers are willing to buy that good.
Because B2B buyers are purchasing for a specific need or from a set budget, price fluctuations in the B2B market are unlikely to result in an expansion or a decline in consumption. Unlike the B2C mindset, most B2B businesses buy only what they need, even if the price of the product or service is lowered. For this reason, it has been argued that unlike B2C, price elasticity does not exist in the B2B marketplace. Or, if it does, it exists only as new users enter the marketplace resulting in the market itself (but not the products) exhibiting elasticity.
This outdated idea has its roots in an analog world where B2B buyers had limited visibility into prices from other vendors and were willingly locked into contracts because “that’s who we’ve always bought from.” So, while it is true that unless a price change is passed on to the end-user where it could cause a change in purchasing habits which then triggers demand elasticity to flow back up the supply chain, this doesn’t translate into B2B price elasticity being non-existent.
Another antiquated, over-simplified argument is that even if measured as price elasticity of market share, price elasticity just can’t work in the B2B market because price changes will result in price-sensitive buyers always being hooked by the vendor with the lowest prices creating a constant back-and-forth and/or competitors engaging in price wars where no one wins.
Thinking of price elasticity as facilitating a race-to-the-bottom completely ignores the nuances of pricing, especially now that businesses can employ algorithms that consider key variables like cost, supply, demand, and a customer’s buying behavior to derive optimized prices. (Not to mention that more advanced technology can also bring in market data or market indexes as covariates and adjust pricing in response and even detect seasonality and predict overall market demand.) It also disregards how value-based pricing can layer on top of optimized, market-relevant prices attracting the loyalty of those buyers who see your business as their go-to, trusted, collaborative supply chain partner.
Leveraged correctly, price elasticity can not only maximize your revenue or profit from your digital channels, but it can also improve your brand’s relationship with your customers. Your buyers will know the price of every product you sell, and they will be able to accurately estimate the value of your offering before considering their purchase.
B2B Price Elasticity Exists: Optimizing Prices in the Context of Changing Market Demand
Simply put, there is price elasticity in the B2B market space. Price elasticity in B2B is based on a price-volume relationship where business leaders have insight into what’s going to happen to volume (relative to their competitors in the same space) if they raise or lower prices.
Although it’s true that knowing how to price for price elasticity in B2B isn’t going to grow the overall market as it would in B2C, it can grow your share of the market by changing your win rates within that market. And there is a way for B2B businesses to do this without triggering pricing wars.
Technology has changed the way we see and navigate the B2B market, giving pricing and selling leaders the power to leverage price elasticity. With the continued expansion and application of AI and machine learning, pricing professionals now have the tools to see the relationship between price and demand in a buyer’s past transactions and get an optimized price recommendation based on that demand-elasticity curve.
For businesses, this translates into bigger wins, higher profitability, and the ability to capture market share. And for their buyers, it means a frictionless buying experience that encourages increased loyalty.
You Can Use Price Elasticity to Grow Wallet Share
Without accurate, optimized pricing, there can be real revenue consequences. Delayed and outdated pricing information can drive a customer to look to a competitor. To maintain and grow their customer base, businesses must understand the power of price elasticity in the B2B market space.
Good thing then that, unlike Bigfoot, price elasticity in the B2B market exists and it’s easy to find.
Now that you know that B2B price elasticity is not a myth, you can grow your business by harnessing elasticity’s power to set market-relevant, channel optimized prices to convert more buyers and capture more wallet share from the flood of consumers wanting to purchase in a self-service, digital marketplace.
If you’d like to learn more about an omnichannel solution that can account for price elasticity and quickly deliver market-relevant prices across all possible customer and product purchase scenarios, you’ve come to the right place. Check out our other resources listed below to learn more:
To Learn More:
Debunking the Top 3 Misconceptions Around B2B eCommerce
Using AI to Optimize Prices with Demand Elasticity
How PROS Guidance Optimizes Prices for Changing Demand