Effectively pricing products can be a balancing act. For companies in business-to-business markets with sometimes thousands of products, it is a particularly complex challenge. As a result, these companies tend to actively manage the pricing of only key products on the basis of value delivered to customers and competitors’ prices, reserving simple cost-plus approaches for the rest. They largely neglect active pricing for the vast majority of products in the “long tail.”
When many managers think of the long tail, they often picture an online retailer that sells a vast selection of products to consumers thanks to its nearly limitless shelf space. However, long tails are common in many business-to-business companies. They frequently customize and repackage offerings that can be sold to only an extremely small number of customers, producing thousands of SKUs. As a result, these companies often follow a one-size-fits-all pricing strategy—what we call the 20-80-50 formula: 20 percent of an organization’s products receive 80 percent of the attention from sales and management while accounting for only 50 percent of the company’s profits. The approach is not surprising; it makes good sense to devote sizable resources to the highest-selling products.
Nevertheless, the 20-80-50 formula means 80 percent of the company’s products are undermanaged, even though they account for the remaining 50 percent of profits. These products represent little revenue individually but significant margin upside collectively. If they were managed better, they could generate meaningful results.
Companies undermanage the long tail because they lack transparency into the true costs of complex products and because they find it too time consuming or expensive to use sophisticated pricing tools such as choice-based modeling, value estimates, customer value-perception surveys, and competitor value maps. However, by not actively managing long-tail pricing, companies miss out on opportunities to capture the full value potential of their product portfolio.
The Boston Consulting Group has developed an approach to long-tail pricing that addresses these challenges. It is a way for organizations to seek out and calculate the costs of complexity that matter, assess pricing on the basis of the value delivered and product differentiation, and ensure a robust implementation of a new pricing approach. Our view is that long-tail pricing does not have to be daunting.
A specialty chemicals company, for example, systematically addressed the long tail of more than 15,000 products, delivering a margin increase of 10 percentage points and a market share increase of 3 to 5 percentage points. Another industrial-goods company repriced 20,000 products and options, which translated into a margin increase of 5 percentage points and a rise in market share of 2 percentage points. Many other leading business-to-business organizations have experienced similar breakthrough results when they have taken the necessary steps to implement this approach.
In this article, we explain how to execute a strategy for effective long-tail pricing. This well-tested approach makes it possible to tailor the pricing of products to specific product and customer segments and achieve winning results.