B2B pricing: building a corridor between cost, alternative and value.
Key distinctions
Three conditions before calculating.
Credible alternative
The reference is not always the current price: it can be a competitor, an internal solution, inaction or a combination. The alternative must include its running costs and its risks.
Provable value
Time saved, downtime avoided, revenue increased or risk reduced must be quantified with a source accessible to the customer. A promise that cannot be verified remains an argument, not a component of the price.
Sustainable sharing
Capturing all the theoretical value weakens adoption and renegotiation. The corridor shows supplier contribution and customer surplus at the same time, to make the trade-off explicit.
Method
Turning a value proposition into a negotiable price
- 01Establish the reference
Quantify the alternative over the same duration, the same perimeter and the same service level; add hidden costs, risks and the internal resources genuinely required.
- 02Quantify the differentiation
Compute the specific gains and losses — productivity, availability, quality, lead time, compliance and revenue; apply a probability of realisation and a contractual horizon.
- 03Build the corridor
Set the floor from the cost to deliver and the risk, the competitive benchmark from the alternative, and the ceiling from the total economic value.
- 04Negotiate the terms
Trade price, volume, duration, guarantee, indexation and risk sharing without conceding an unfunded discount. Every concession must obtain a measurable counterpart.
The value bridge and the negotiation corridor
The model starts from the customer's alternative, adds the differentiated gains, removes the switching costs and places the price between floor and ceiling.
An offer at €58,000 leaves €30,400 of surplus to the customer
The alternative costs €32,000. The solution saves 1,200 hours at €42, avoids €18,000 of downtime and imposes €12,000 of switching. The supplier cost is €18,000.
Net differentiated value: 1,200 × 42 + 18,000 − 12,000 = €56,400. Economic value ceiling: 32,000 + 56,400 = €88,400. At €58,000, supplier contribution is €40,000 and customer surplus €30,400.
The price of €58,000 is defensible if the hours and the downtime avoided are validated. A measurement clause can share part of the value if the customer disputes the uncertainty.
Acceptance conditions
What must be true to act.
- 01
The alternative and the solution are compared over the same contractual horizon.
- 02
Every gain has a source, a probability and a customer owner.
- 03
The price stays above the floor after risk and cost to deliver.
- 04
Any commercial concession obtains a counterpart in duration, volume or risk.
Limits
What this analysis does not prove.
- Economic value does not entirely represent the political willingness to pay.
- The gains can depend on the customer's adoption and processes.
- The corridor must be recomputed if the perimeter, the risk or the alternative changes.
References
Works cited.
- Anderson, J. C., Narus, J. A. & van Rossum, W. (2006), “Customer Value Propositions in Business Markets”, Harvard Business Review.
- Hinterhuber, A. (2004), “Towards Value-Based Pricing”, Industrial Marketing Management, 33(8), 765–778.
- Nagle, T. T., Hogan, J. E. & Zale, J. (2016), The Strategy and Tactics of Pricing.