Business-to-Business Marketing
Pricing Strategies in Industrial Markets
Haas School of Business
UC Berkeley
Fall 2008
Week 3
Zsolt Katona
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Stock prices
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Prediction Market
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Today’s Agenda
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Rohm and Haas – case discussion
Signode Industries – case discussion
On pricing – in general
B2B pricing – three common contract types
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Overview
An overview of pricing strategies
• Basics
– Pricing objectives
– Common pricing methods
– Demand-based pricing
• Advanced pricing
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Price discrimination
Bundling
Behavioral pricing
Dynamic pricing
Competitive pricing
Pricing in Business to Business Markets (3 common types)
– Most Favored Customer clause
– Meet the Competition clause
– Take or Pay contracts
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Basics
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Pricing objectives
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Survival
Maximum current profit
Maximum current revenue
Maximum growth
Predatory pricing
Price signaling - image building
Maximum long term profit
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Common pricing methods
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Mark-up pricing
Target return pricing
Perceived value pricing
Going rate pricing
Sealed-bid pricing
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Price pressures
Competition creates
down pressure
POTENTIAL PERCEIVED VALUE
Marketing communication
can raise perceived value
CONSUMER’S WILLINGNESS TO PAY
Feasible price
Consumer’s
incentive to buy
range
PRICE
Producer’s reward
(contribution to fixed
cost)
VARIABLE COST
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Demand-based pricing
• Elasticity of demand:
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Optimal elastic pricing:
Local price in-elasticity
Price as a signal of quality
Price response and other
marketing mix
• Measuring price response
– Market level (Econometrics)
– Individual level (Conjoint)
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Advanced pricing
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Price discrimination
(Pigou, 1920)
• First degree: each customer is charged his/her
reservation price.
• Second degree: customers self-select between price
plans (customers choose products/prices).
• Third degree: customers are discriminated based on
observable characteristics (firms choose customers).
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Bundling
• Two movies, two
movie theaters
Movies
A
B
1
12
3
2
10
4
Theaters
At what price should the movies
be sold to the theaters if the seller
cannot discriminate?
PA=
PB=
What is the optimal bundle?
PA+B=
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Behavioral pricing
When people process information, they may arrive
to different conclusions depending on how the
information is presented.
Framing or context effects:
- People’s willingness to pay for a product
may depend on the price of similar products.
Works for goods whose value is hard to
evaluate (e.g. fashion item in a boutique).
- People’s attitude towards risk depends on
whether the purchase is framed as a loss or a
gain compared to status quo.
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Prospect Theory

Lottery, L: (x, y, p)
with
E(L)=px+(1-p)y
f($)
x
p
y
1-p
E (

$
(L)) = pf(x)+(1-p)f(y)
(E (L)) = f [px+(1-p)y]
Status Quo
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Dynamic Pricing
Objective:
where T is the time horizon; r is the discount
rate
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Basic dynamic pricing strategies
• Penetration:
– Playing on repeat purchases (addiction effects)
– Network externalities (technology standard setting
or diffusion effects)
– Learning on costs and entry deterrence
• Skimming:
– Inter-temporal price-discrimination and the
problem of expectations/commitment
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‘Competitive’ pricing
1. Predatory Pricing to deter entry or to
force a competitor to exit (illegal).
2. Substitutes and Complements (see
before):
– Substitutes: I increase my price and my
competitors’ demands increase (e.g.
competing brands in the same category).
– Complements: I increase my price and my
competitors’ demands decrease (e.g.
tennis balls and rackets).
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Cooperative pricing
Cooperative pricing methods
– Round table collusion (e.g. Telecom)
– “Umbrella pricing” and “price leadership” (e.g.
Signode)
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Pricing in Business to Business Markets
• Contracts with customers
– 1. Most Favored Customer clause (MFC)
– 2. Meet the Competition clause (MCC)
• Contracts with suppliers
– 3. Take or Pay contracts
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1. Most-Favored-Customer Clause
• MFC is a contract or formal commitment from the
seller that guarantees the customer the best price the
company gives to anyone.
• Also called:
– Most-favored-nation clause
– Best-price provision
• Common in business-to business markets from raw
materials to hi-tech products.
• Makes sure customers are treated equally, they are
not at a disadvantage vis-à-vis one another.
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Examples of MFCs:
• Federal Election Campaign Act (1971): campaign
spot rates for candidates be as low as lowest
commercial spots.
• Medicaid Reimbursement Act (1990): Government
gets lowest of 88% of average branded drug price or
best retail price.
• “Cortes in Mexico…”
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MFC: The seller’s perspective
• Pros:
– Seller becomes a tougher negotiator (tiger)
– Reduces the customer’s incentive to negotiate (instead
provides customer an incentive to free-ride on other
customers’ negotiation efforts)
• Cons:
– It only works if seller has considerable monopoly power
• Seller’s rival can get the seller’s customer easier
• It is harder for the seller to get his rival’s customer
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MFC: The buyer’s perspective
• Pros:
– Ensures buyer’s rivals are not at a cost advantage
– Buyer doesn’t look bad if other competitor’s make a better
deal
– Buyer can benefit from other buyer’s superior negotiating
skills
• Cons:
– Buyer loses incentive to negotiate (pussycat)
– With other buyers having MFCs it is harder to get a special
deal
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2. Meet-the-Competition Clause
• MCC is a contract that gives the seller an option to
retain the buyer’s business by meeting any rival bids.
• Also called:
– Last-look provision
– Meet-or-release clause
• Often the un-written rule in business marketing.
• MCC-s work because responding to an RFP is not
cheap and it is risky
– The process of responding is costly (time, feasibility studies,
etc.)
– Low probability to succeed
– Profit prospects are questionable
– Low bid may trigger a price war even if you win.
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Example of MCC:
Miami Dolphins sold for only $138 million to
Huizenga who had an MCC on the team.
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MCC: The seller’s perspective:
• Pros:
– Reduces the incentives for competitors to bid
– Takes the guess work out of bidding (seller knows the bid he
need to beat)
– Lets seller with the final decision to keep/drop customer
• Con:
– Allows competitors to bluff (bid w/o delivery), only relevant if
their objective is to explicitly hurt the seller.
• Competition:
– Imitation makes MCCs work better - competitors do not
challenge each other’s business. It is a collusion device.
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MCC: The buyer’s perspective
• Pros:
– It creates incentives (means) for suppliers to invest in the
relationship
– Suppliers often offer superior service in return.
• Cons:
– Leads to higher prices.
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MFC’s and MCC’s supplier-side analogues
• “Most favored supplier clause”
– Buyer commits to pay the supplier at least as much as to any other
supplier.
– Example: compensation contracts
• MCC for suppliers:
– The supplier commits to continue supplying provided that buyer
matches the best price anyone else offers
– Suppliers typically get paid less when they have granted an MCC
– Example: Professional Sports (basketball, hockey): team owners
have an MCC in some of their contracts with athletes.
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3. Take-or-pay contracts with suppliers
• The customer either takes the product from the
supplier or pays a penalty up to a ceiling
• Example: I agree to pay $10 for each unit up to a 100
units and if I buy less than a 100 units I pay $8 for
each unit I didn’t buy.
• Examples:
– commodity inputs (electricity, cable programming)
– suppliers with large fixed costs and low variable costs /
products that are hard to store
– essentially turns the supplier’s fixed costs into variable costs
(reverse for the buyer).
– risk sharing between buyers and sellers
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Take-or-pay contracts: buyer’s perspective
• Pros
– Reduces risk to the supplier, in return for which buyer can
ask to pay less
– Reduces the incentive of the buyer’s rival to come after the
buyer’s customer (buyer becomes a tiger).
• Con:
– Works like nuclear deterrence: price war is devastating if
deterrence fails
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Conclusion
• Pricing is important and easy to make
mistakes
• Short term decision, but long term
objectives
• R&H: Value pricing
• Signode: Price leadership issues
• Typical B2B pricing contracts
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