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.