Chapter 15. Managing the
Industrial Pricing Function
BA 303 - B2B Marketing
Lindell Phillip Chew
The Meaning of Price in Business
Markets
A. Product equals attribute bundles
1.
Product specific
2.
Company-related
3.
Salesperson-related
The buyer sees the cost of a business
product as much more than the seller's
price.
Benefits of purchasing
from given supplier
• I. Product involves more than the physical product
The product possesses……..
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a.
b.
c.
d.
Financial benefits
Functional benefits
Operational benefits
Personal benefits
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
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
The Industrial Pricing Process
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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
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
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
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
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
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
COST VOLUME PROFIT ANALYSIS
Classifying 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
Experience effects
1. Total costs of a product decline over time as
volume increases
2. Broader range of costs than learning curvedistribution, 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
Pricing flexibility depends on
the degree to which the product
differentiates from competitive
products
• Competition Strong rivalries in
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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
Pricing Across the Product Life Cycle
Pricing new products
Skimming vs. Penetration
• Skimming
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1. Reach segments impervious to high initial
prices
2. Capture early profits
3. Reduce price as competition enters
• Penetration
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1. Used when demand is elastic, strong threat of
competition, and opportunities for cost reductions
as volume expands
2. Advantages associated with gaining large
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
Tactical Pricing
Considering the unique customer
and order-specific costs of each
transaction
• 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
Competitive Bidding
The buyer's side
Most government buying done by
• Closed bidding
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
INTERNATIONAL PRICING
INVOLVES OFFSETS
• OFFSETS- 40% of world trade( ham for planes)
• COUNTER PURCHASE
• COMPENSATION
• BARTER
• SWITCH
• Hear about the worlds largest barter???????
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?
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
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CHAPTER 15: PRICING
STRATEGIES FOR BUSINESS
MARKETS
LPC1@umsl.edu