Chapter 15. Managing the Industrial Pricing Function

1. Chapter 15. Managing the Industrial Pricing Function BA 303 - B2B Marketing Lindell Phillip Chew

2. The Meaning of Price in Business Markets • Product equals attribute bundles1. Product specific2. Company‑related3. Salesperson‑related The buyer sees the cost of a business product as much more than the seller's price.

3. Benefits of purchasing from given supplier • I. Product involves more than the physical product The product possesses…….. • a. Financial benefits • b. Functional benefits • c. Operational benefits • d. Personal benefits

4. Costs associated with a supplier • Tangible‑price, transportation, installation, inventory • 2. Intangible‑risk of product failure and/or service failure • 3. Formal vendor evaluation programs highlight the importance of total cost

5. Costs associated with a supplier • The supplier with the lowest initial price may be the highest cost alternative in the long run Low‑price bidders frequently are not awarded an account Value‑based strategies 1. Provide lower cost‑in‑use solutions 2. Focused on long‑term relationships

6. The Industrial Pricing Process • Price objectives • I. Congruent with marketing corporate goals • 2. Collateral goals • a. Target returns on investment • b. Market share • c. Competitive • 3. Far‑reaching effects on market strategy and firm goals

7. Demand determinants • Assess the value provided to customers Value depends on the attributes of the product offering Evaluate the relative importance of the attributes to each market segment Price differentials vis‑a‑vis competitors can be determined by comparing the total value buyers associate with attributes provided by each competitor

8. Demand determinants • Cost/benefit strategy implications • Promotion used to align customer perceptions of value with actual product performance • Use promotion to change customer value perceptions for a particular attribute ‑ Improve performance on selected attributes that are highly valued by customers

9. Elasticity varies by market segment • Elasticity measures customer sensitivity to price changes Influenced by a host of factors End use of the product affects elasticity Demand is inelastic when the product has a small role in the final product's total cost Elastic when the component is a larger proportion of the final product's cost Due to derived demand, analysis of final consumer markets is often required

10. Methods of estimating demand (expectations) • Test marketing Suitable if the product is sold to a large number of users and short usage cycles Not applicable to capital equipment ALSO….. Surveys Managerial judgment

11. Cost determinants Target costs • Target costs Design‑to‑cost philosophy Crate the product to meet a prescribed level of cost Establish allowable costs as device to meet target costs Target costs are a profit‑management tool

12. COST VOLUME PROFIT ANALYSISClassifying costs • Purpose Determine whether fixed or variable costs Link costs to activity causing the cost Types of costs • 1. Direct‑directly traceable to a unit of activity • 2. Indirect‑traceable, but indirectly assigned • 3. General‑cannot be objectively assigned • Remember your contribution margin

13. Experience effects 1. Total costs of a product decline over time as volume increases2. Broader range of costs than learning curve‑ distribution, marketing, administration, and production 3. As accumulated volume expands, unit cost falls by 20 to 30 percent 4. Why costs decline I.earning by doing (experience effect) Economies of scale

14. Pricing flexibility depends on the degree to which the productdifferentiates from competitive products • Competition Strong rivalries in rapidly changing markets • b. Volatility of pricing structure • 3. Gauging competitive response • a Evaluate cost structures of direct competitors • b. Analysis of competitive marketing strategy

15. Pricing Across the Product Life Cycle Pricing new products Skimming vs. Penetration • Skimming • 1. Reach segments impervious to high initial • prices • 2. Capture early profits • 3. Reduce price as competition enters • Penetration • 1. Used when demand is elastic, strong threat of • competition, and opportunities for cost reductions • as volume expands • 2. Advantages associated with gaining large market shares early

16. Product line considerations • Product line considerations • a. Demand and costs of items in a product line are interrelated • b. Try to price all items in the line within the acceptable price range as perceived by buyer

17. Tactical PricingConsidering the unique customer and order‑specific costs of eachtransaction • Win/loss • 1. Insight into how customers define value • 2. What factors prompted getting or losing the business • D. Legal considerations • 1. Price differences must be based on cost differences or to "meet competition" • 2. Marketer needs to develop procedures for documenting price differentials

18. Competitive Bidding The buyer's side Most government buying done by bidding • Closed bidding • 1. Formal process, bids opened and reviewed at a prescribed time • 2. Low bidder not always selected • Open bidding • 1. Informal, involves negotiations • 2. Used when specific requirements are hard to define

19. INTERNATIONAL PRICING INVOLVES OFFSETS • OFFSETS- 40% of world trade- ( ham for planes) • COUNTER PURCHASE • COMPENSATION • BARTER • SWITCH • Hear about the worlds largest barter???????

20. PRICING TERMS OF SALE DISCOUNTS & DATINGS ADVISE ANGIE 3/20 net 60 eom November 21, 2002 Your money is earning 21% annually Invoice amount $100 million When should you pay, how much & why?

21. PRICING A BUSINESS IN PAGEDALE • We will look at the financial statements of a manufacturing business and evaluate the asking price and make an offer An expanded look at pricing

22. CHAPTER 15: PRICING STRATEGIES FOR BUSINESS MARKETSLPC1@umsl.edu