October 20, 2013

Dear B2B Catalog CEOs: Price Points

Dear B2B Catalog CEOs:

Price points yield many interesting outcomes in B2B projects.

In B2C, there is relative uniformity of price points. Yes, when I worked at Nordstrom, you could buy $19 socks or $499 handbags, but that's a department store. If you go to Chicos, customers tend to align around price points that are uniform ... cheap = $10 ... expensive = $90.

In B2B, the range between cheap and expensive is far greater.

This image is from Northern Tool and Equipment. As you can see, Hydraulic Pumps are expensive. And likely profitable. At a $200 price point, let's pretend gross margins are 50% - that's $100 of profit per item sold.

Meanwhile, on the other end of the spectrum ...

... you have Nut Drivers. Pay $34.95 and at a 50% gross margin, you get +/- $17.50 profit per item sold.

Two dynamics happen.
  1. A small fraction of the housefile will buy the expensive items, but these customers are highly profitable.
  2. A larger fraction of the housefile will buy inexpensive items, but these customers generate marginal levels of profit.
Pay close attention to the items you acquire a customer with. The high price items signal a willingness of a customer to spend larger amounts of money, and consequently, signal high long-term value customers. Customers acquired via low price point items need to be closely monitored - if they quickly upgrade to high-price items in a second purchase, then you're cruising!

Low price point items do serve an important purpose, especially among high price point customers - they fill in gaps that allow the business to keep the customer active. Instead of a customer buying every 24 months, we convert the customer into one who buys every 4-6 months. Low price point items can play an important role.

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