Do small customers pay more?
Most companies will say their largest customers get the best prices, and smaller customers pay more. They generally believe that if customer prices were plotted on a graph, they would look like Figure 1.
Why do they believe that? Well, it is true at most companies that if you look at the margins earned on the group of smallest customers, they are higher than the margins earned on the group of the largest customers as seen in Figure 2.
Looking at customers in groups can hide some of the true story, though. Although the margins on smaller customers may be higher on average than large customers, it does not necessarily mean that there aren’t some small customers with inappropriately low margins that can and should improve. It is analogous to a team batting average in baseball (we like sports analogies). The Yankees may have a team batting average of .280, but they might have some players hitting much closer to .200. Most baseball fans would say a player batting .200, unless it is a pitcher, is under-performing. The coaches and fans may be generally happy with the team average, but they expect that .200 hitter to improve.
If sports analogies don’t work for you, consider home prices in various markets. The average price for a 3 bedroom/ 2 bath home in a given market may be $300,000, but actual sale prices on 3/2 homes will vary substantially. Some sellers are in more of a hurry and will take less. The negotiating skills of the buyers, sellers, and realtors also vary; so identical homes can sell for different amounts. If the average house was a 30-year-old 3 bedroom/ 2 bath ranch home that needed repairs, but your 3/2 home was only two years old and in perfect condition, you probably should not sell your home for $300,000. Pricing in B2B markets is the same as the two analogies. There is usually a lot of variation within actual prices paid and margins earned. If your company looks at the averages of groups of customers, there are probably several under-performing customers or products that are hidden from your view. Strategic Pricing Solutions can help you determine if your customer prices look like Figure 1, or more likely, Figure 3. If they resemble Figure 3, we can help you begin to correct them.
