Pricing Strategies for Business
Markets
Session 04
Learning outcome
• Examine costs involved in business to business
markets
• Explain Key Components of the Industrial
Pricing Process
• Discuss value-Based Approach for pricing
Benefits of a Particular Product
 Functional benefits are the design
characteristics that might be attractive to
technical personnel.
 Operational benefits are durability and reliability,
qualities desirable to production managers.
 Financial benefits are favorable terms and
opportunities for cost savings, important to
purchasing managers and controllers.
 Personal benefits are organizational status,
reduced risk, and personal satisfaction.
•A broad perspective needed in examining the costs a particular
alternative may present for the buyer.
•Rather than making a decision on the basis of price alone,
organizational buyers emphasize the total cost in use of a particular
product or service.
Customers’ Cost-in-Use Components
Key Components of the Industrial
Pricing Process
•There is no easy formula
for pricing an industrial
product or service.
•The decision is
multidimensional.
•The each interactive
variable assumes
significance.
Price Objectives
•
The pricing decision must be based on
objectives congruent with marketing and overall
corporate objectives.
• The marketer starts with principal objectives
and adds collateral pricing goals:
1. Achieving a target return on investment,
2. Achieving a market-share goal,
3. Meeting competition.
A value-Based Approach for pricing
Differentiating through Value-creation
If relationships are more valuable to customers than price and
costs, then marketers need to emphasize unique add-on benefits
around:
• Building trust
• Demonstrating commitment
• Being flexible
• Initiating joint ventures
• Working on developing deeper relationships
• These efforts enhance customer value & loyalty.
Differentiating through Value-creation
Research suggests that most companies offer similar services, however, the
following seem to be more prominent.
1. Service support
2. Personal interactions
3. Supplier know-how
4. Ability to improve customer’s time to market
Moderate differentiating factors include:
a. Product quality
b. Delivery
c. Acquisition and operation costs
Differentiating through Value-creation
The equation highlights how the relative perceived values of two
competing offerings are compared.
The premium price differential, or perceived relative value, can be broken
down into components based on each important attribute:
1. the value of the attribute to the buyer,
2. the perception of how competing offerings perform on that attribute.
Relative Perceived Value of Two Product Offerings
Price Elasticity of Demand
• The rate of percentage change in quantity
demanded attributable to the percentage change
in price.
• Factors of price elasticity,
– The ease with which customers can compare
alternatives.
– The importance of the product in the cost
structure.
– The value that the product represents to a
customer.
Target
Costing
Target costing features a design-to-cost philosophy that begins by
examining market conditions:
– Identifies and targets the most attractive market segments.
– Determines what level of quality and types of product attributes
will be required to succeed.
Cost Classification System Goals
1. Properly classify cost data into their fixed and
variable components.
2. Properly link them to the activity causing them.
Analysis of Cost Concepts
1. Direct traceable or attributable costs.
2. Indirect traceable costs.
3. General costs.
Sources of the Experience Effect
1. Learning by doing.
2. Technological improvements.
3. Economies of scale.
Selected
Cost
Comparison
Issues:
Followers
Versus the
Pioneer
Under certain conditions, followers into a market may confront lower
initial costs than did the pioneer. By failing to recognize potential cost
advantages of late entrants, the business marketer can dramatically
overstate costs differences.
Pricing New Products
Skimming
– Appropriate for a distinctly new product, provides the firm with an
opportunity to profitably reach market segments that are not
sensitive to the high initial price.
– Enables the marketer to capture early profits.
– Enables the innovator to recover high developmental costs more
quickly.
Penetration is appropriate when there is
1. High price elasticity of demand,
2. Strong threat of imminent competition,
3. Opportunity for a substantial reduction in production costs as
volume expands.
Price Attacks
Rather than emphasizing the lowest price, providing superior
value.
1. Is there a response that would cost you less than the preventable
sales loss?
2. If you respond, is the competitor willing and able to merely reduce
the price again to restore the price difference?
3. Will the multiple responses that may be required to match the
competitor's price still cost less than the affordable sales loss?
4. Is your position in other markets (product or geographic) at risk if the
competitor increases market share?. Does the value of all the markets
that are at risk justify the cost of the strategic response?
Evaluating competitive threats
The Rules of Competitive Strategy
• Never participate in a competitive engagement
you cannot win.
• Always participate in competitive engagement
from a position of advantage.
Competitive Bidding
• Closed bidding, often used by business and
governmental buyers, involves a formal
invitation to potential suppliers to submit written,
sealed bids for a particular business opportunity.
• Open bidding is more informal and allows
suppliers to make offers (oral and written) up to
a certain date.
Strategies for Competitive Bidding
• Bidding is costly and time consuming.
• Screen the project to make sure the contract is related to your
core competencies and is one you can perform (profitably).
• Price to a level that, hopefully, will allow you to win the contract
but not bankrupt you.
• Sometimes it is worth winning a contract even at a small loss if it
can lead to bigger contracts.
• The determinant is the switching costs involved for the buyer to
bring on another vendor.