0:12
Can we really address the market in a meaningful way?
Well one of the ways we can do this is just like we did in the B2C space.
Product versioning.
That also happens in the B2B space.
Companies set up one product and then they say, hm, I've got this one product,
it's selling well.
Maybe I can set up a product line so that my business customers that want to spend
a lot of money can buy the better product.
And the ones that want to spend less, can buy the less expensive product.
So that's just the same thing that we saw, just in a different context.
0:51
What does that mean in particular?
It means that sometimes your product has more value.
And when I mean value,
I don't mean psychological value, I mean real money value, real economic value.
It may have more value to one company versus another company.
For example, SmartOps sold supply chain management software for
companies that had a lot of inventory, that's very valuable software.
For companies that had a little inventory, it still might be valuable, but
it's not as valuable as that company that had a lot of inventory, right?
So, what does SmartOps want to do?
They want to charge a higher price to the company for
which they have a lot of value.
1:36
How do you do that?
That's tricky.
It really is quite tricky.
But there are sometimes some ways you can do that.
SmartOps can't go in and say, hey,
by the way, how much value does this have for you?
That clearly is not going to work in the real world.
But what they can do is they can charge based on the size of the company.
A lot of the companies they sell to have public records that say what their
revenue is.
And they can say well,
if you're a small revenue company, we're going to charge a low price.
If you're a big revenue company, we're going to charge a higher price.
And why do they do that?
Because the size of the company correlates to the amount of inventory that they
often have.
So in that case while they don't have perfect transparency and
give the amount of money they're saving someone, they have an approximation of it.
And based on that approximation,
they're going to set different prices in the marketplace.
It really is very common in these software markets to do that.
But anytime where you feel like you have different value to a different company,
if there is some variable you can grab, if there's some kind of information out there
that you think correlates to that value.
Try to get it,
because you might be able to adjust prices based on that information.
2:50
Also, quantity discounts is a form of price discrimination
very common in B2B marketplaces.
Why is that often effective price discrimination?
Well, your big buyers have a lot of market power so
they're probably going to demand low prices.
Your smaller buyers don't have as much market power, so
you can price higher to them.
So there's differences in willingness to pay,
based on what essentially are power differences in the marketplace.
If you set up a Quantity Discounts schedule, that can take advantage of that.
Now, Quantity Discounts are, in general legal.
But you do have to watch some issues about this.
And the number one thing you have to watch is,
if you offer a quantity discount schedule, it has to be available to everyone.
Now your small buyers may not take it, that's fine, but
it has to be available to everyone.
If you do that right, that's a very good price discrimination and
price segmentation strategy.
And finally, Product or Service Bundles.
If you're selling a lot of different things,
it may be the case that if you bunch some things together,
you can get a higher price from one of your buyers, right?
Don't just sell them one thing, sell them two things, three things,
put them all in a package.
Maybe gave them a different price on that,
maybe a smaller price, than if they bought them separately.
But doing that, what you can do is you can get your big buyers and
get them to spend a lot of money.
Where your smaller buyers, you may have to sell things individually because
they're simply not going to have the money to buy the bundle.
Also you have to watch for legality on this, too.
The key for this is, you can't be a monopolist in one of the items.
Here I have a computer.
Think about home Internet service, and I have a phone, like landline service.
If you're a monopolist in the home internet service in your area,
you can't say I'm not going to give you internet service unless you buy
telephone service from me, that would be illegal.
Because you're a monopolist in one of the items.
But in general, in most company and most real world situations,
you're not monopolists on any of the items in your bundle.
Your buyers could go somewhere else and get it, right?
And if you can do that, then you can set up these bundles in a way that extracts
a lot of money from some of your buyers and less money from others of your buyers.
So what are the four practical ways to do this in the B2B marketplace?
First you've got Product Versioning,
that's just like it was in the business to consumer space.
You've got Pricing to Value, which is really unique to B2B.
And you have to look for that variable that correlates with the economic value
you're providing to a company.
You got Quantity Discounts, a very common tactic, and
finally smart ways to set up Product and Service Bundles to extract rents,
to extract higher prices from your big buyers.
Jean Manuel IzaretSenior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. WilcoxNewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Thomas KohlerAssociate Director, Pricing
