Pricing Opacity

by Tim Smith, PhD, 29 September 2004

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In consumer markets, prices are transparent. Anyone wanting to know the price of a good or service, competitors and prospective customers alike, can easily call for a price quote or look-up the list price. In contrast, prices are opaque in many business markets. Even in markets where price lists are available, the practice of discounting allows transaction prices to vary within a broad range. The opacity of prices in business markets biases buyer behavior towards slower demand growth, creates uncertainty in setting strategic prices, and presents a management challenge in pricing individual transactions.

Structurally Induced Opacity
Opaque pricing in business markets is partly due to the structure in which value offerings are constructed. Through the solution selling process, salespeople uncover the demands of customers and develop solutions to address their challenges. The correct solution for any one prospect could differ significantly from that needed by others. In constructing the vision of the correct solution for a specific prospect, the price is also constructed. Prices can only be set once the deliverable is well defined; thereby the practice of solution selling naturally forces opaque pricing.

Price discovery through the sales process is sometimes practiced in consumer markets, for example in home remodeling or auto repair, yet most consumer markets function with list prices. Even in business markets that can be classified as transactionally oriented and dealing with commodity inputs, price variances are common. Discounting practices in business markets created from the competitive environment and volume/delivery based cost differentials drive prices away from published price lists when such lists are available.

Buyer Behavior
The opacity of pricing in business markets affects buyer behavior. In making purchasing decisions, buyers require prices in order to evaluate whether the value of utilizing the product or service is greater than cost to acquire. To help buyers in their quest for information, businesses may communicate to prospects a general price range early in the sales process for budgetary purposes. Later, when the buyer is close to making a purchasing choice, the actual price for the deliverable will be delineated. This creates a challenge in managing expectations between the earlier communicated price range and that at the actual price of the transaction.

If the budgetary figures quoted early in the sales process are too high, prospects may dismiss the value offering as exorbitant and pursue a different course of action. Alternatively, if the budgetary figures are too low, prospects may have unrealistic expectations during closing negotiations. While these challenges can be managed by a skilled sales team, the uncertainty facing prospective buyers concerning price has a tendency to slow down the velocity of individual sales as well as depress overall demand.

Off-competitor Value Based Pricing
Opaque pricing induces uncertainty in strategically pricing off-competitors that is not present in price transparent markets. In transparently priced markets, suppliers can easily observe competitors’ prices through a number of informational sources including direct observation. With the competitors’ prices revealed, suppliers can then price at parity, competitively, or at the high-end of the market depending upon their value differential. With opaque pricing practices, business marketers must make decisions in the face of uncertainty in pricing according to their value differential.

In most business marketers, price managers rely upon sparse quantities of questionably valid information. The wins and losses associated with individual transactions may be used to uncover competitor prices, yet price information derived from individual transactions will be entangled with information concerning positioning and value differentiators. Likewise, asking customers about a competitor’s price is likely to be biased towards a lower number.

Tactical Pricing
Along with the informational challenge of strategically setting prices at the corporate level, executives face further challenges in tactically managing prices at the individual transaction level. In tactical price management, executives must manage when prices are communicated, how they are communicated, and the size of price variances. These tactical pricing issues must be managed for each and every sale at the individual transaction level. Outside of a few rare markets, no consumer marketer has to manage prices on a transaction by transaction level.

Concurrently, much of the information required for sound strategic pricing is gathered at the tactical level. Through direct contact with individual prospects and customers, salespeople will inquire about their competitors’ prices. This information is used for decision making both tactically to win individual customers and strategically to set pricing policy.

Managing pricing, price information dissemination, and price information collection on a transaction-by-transaction basis increases the importance of the seller’s tactical price management skills. Organizational processes are required to facilitate tactical pricing challenges and the acquisition of tactical pricing information. Sales team skills must be developed to manage buyer’s price expectations and negotiations. The organizational culture must accept a higher level of uncertainty and privacy regarding pricing.

Different Skill Set
Structurally induced price opacity in business markets influences buyer behavior, competitive pricing uncertainty, and tactical price management. Even in price transparent business markets, discounting practices will drive uncertainty with respect to transaction prices. The influences of opaque pricing on setting prices, managing price variances, and communicating prices to customers creates challenges for business marketers which their counterparts in consumer markets may never address. While some of the underlying pricing concepts may be transferable from consumer markets to business markets, the implementation and priorities will be very different.

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Author
Tim Smith, PhD is Editor of The Wiglaf Journal, Principal of Wiglaf LLC, and Adjunct Professor at DePaul Graduate School of Business.

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