Pricing%20Strategy%20for%20Business%20Markets

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Chapter 14 Pricing Strategy for Business
Markets
PowerPoint by Ray A. DeCormier, Ph.D. Central
Ct. State U.
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Chapter Topics
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• Understanding how customers value pricing is the
  essence of the pricing process. Chapter topics
  include
• The value-based approach for pricing
• The central elements of the pricing process
• How effective new product prices are established
  and the need to periodically adjust the prices of
  existing products
• How to respond to a price attack by an aggressive
  competitor
• Strategic approaches to competitive bidding

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Customer Value in Business Markets
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Customer Value
Sacrifices
Benefits
Core Benefits
Add-on Benefits
Acquisition Costs
Processing Costs
Usage Costs
Source Adapted with modifications from Ajay
Menon, Christian Homburg and Nikolas Beutin,
Understanding Customer Value in
Business-to-Business Relationships, Journal of
Business-to-Business Marketing 12, No. 2 (2005),
pp. 1-33.
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Sacrifices Total Costs

• Total Costs Acquisition Possession Usage
• Acquisition Purchase price, transportation,
  administrative costs, errors, costs to evaluate
  supplier, expedition costs
• Possession Costs Finance, storage, inspection,
  insurances, taxes, internal handling
• Usage Costs Costs for ongoing use such as
  installation, training, field repairs,
  replacement, disposal

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Customers Total Cost-in-Use Components
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Differentiating through Value-Creation
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• 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.

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Differentiating through Value-creation
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• 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 customers time to market
• Moderate differentiating factors include
• 1. Product quality
• 2. Delivery
• 3. Acquisition and operation costs

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Key Components of the Price-Setting Decision
Process
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Fig. 14.2

• No easy formula for pricing industrial product
  or service
• Decision is multidimensional
• Each interactive variable assumes significance

Set Strategic Pricing Objectives
Estimate Demand and the Price Elasticity of
Demand
Determine Costs and their Relationship to Volume
Examine Competitors Prices and Strategies
Set the Price Level
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Demand Determinants Assessing Value
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• There are a number of issues when considering
  demand
• Usage and importance of the product/service by
  various segments
• Price Sensitivity (elasticity of demand)
• Assessing Value Competitive Value comparisons
  
• Assume same product by 2 different competitors
• Assume (A charges 24 B charges 20)
• Why might a buyer prefer A over B?
• Could it be that buyer prefers A more than B
  because As total offering provides more value
  than B?

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Fig 14.3 A Value-Based Approach for Pricing
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Define the key market segments
Isolate the most significant drivers of value in
customers business
Quantify the impact of your product or service on
each value driver in customers business
Estimate the incremental value created by your
product or service, particularly for those
features that are unique and different from
competitors offerings
Develop pricing strategy and marketing plan
SOURCE Adapted from Gerald E. Smith and Thomas
T. Nagle, How Much Are Customers Willing to
Pay, Marketing Research 14 (winter 2002) pp.
20-25.
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Elasticity Varies by Segments
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• Price elasticity measures how sensitive customers
  are to price changes.
• Price elasticity of demand refers to rate of
  percentage change in quantity demanded to
  percentage change in price.

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Elasticity of Demand
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Elasticity of Demand
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Other Factors
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• Satisfied customers are less price sensitive
  therefore one strategy is to make our customers
  very satisfied so price isnt as much of a
  determinant.
• Switching costs is a consideration depending upon
  products. The more sophisticated and unique the
  product is, and the more vested interest (costs)
  in it is, the more apt for the customer to not
  switch.

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Other Factors
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• End Use How important is the product as in input
  into the total cost of the end product?
• If cost is insignificant, then demand is
  inelastic.
• End-Market Focus Since demand for many
  industrial products is derived from the demand
  for the product of which they are a part, STRONG
  end user focus is needed.

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Value-Based Segmentation
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• Some industrial product may serve different
  purposes for different markets.
• Each segment may value the product differently.
• By identifying applications where the firm has a
  clear advantage, and by understanding the value
  of it to each segment, marketer may be able to
  administer price differentiation in each segment.

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Target Pricing Costing
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• Many companies base price off of costs
• Problem Method is internally driven, not market
  driven
• A better approach is to use Target Pricing
• It starts by examining and segmenting the market
• Determine what type, quality and attributes each
  segment wants at a pre-determined target price
• Understand the perception of value to the target
  selling price
• Then calculate costs considering margins

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Cost Concept Analysis
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• Direct Traceable or Attributable Costs All
  costs, fixed or variable, that are solely
  incurred for a particular product, territory, or
  customer (e.g., raw materials)
• Indirect Traceable Costs All costs, fixed or
  variable, that can be traced to a particular
  product, customer or territory (e.g., general
  plant overhead)
• General Costs Costs that support a number of
  activities not directly related to a particular
  product (e.g., administrative overhead, RD)

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Competition
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• Competition establishes an upper limit on price.
• Price is only a component of the cost/benefit
  equation.
• There are many ways to have a differential
  advantage other than price advanced features,
  technical expertise, timely delivery and product
  reliability (zero defects) to name a few.
• Service and support also have a differentiating
  affect.

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Followers vs. Pioneers
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Pricing Strategies

• 3 Major Pricing Strategies
• Follow the Crowd
• Price Skimming
• Penetration Pricing

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Price Skimming
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• Price Skimming is charging a high initial price
• Price Skimming
• Appropriate for distinctly new products
• Provides the firm with opportunity to profitably
  reach market segments not sensitive to high
  initial price
• Enables marketer to capture early profits
• Enables innovator to recover high RD costs more
  quickly
• Strategy As the product goes through its
  product life cycle, the strategy is to lower the
  price in line with production and demand capacity.

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Penetration Pricing
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• Penetration Pricing is charging a very low
  initial price.
• Penetration Pricing is appropriate when there is
  
• High price elasticity of demand
• Strong threat of imminent competition
• Opportunity for substantial production cost
  reduction as volume expands

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Price Discrimination
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• The Robinson-Patman Act of 1936
• holds that it is unlawful to discriminate in
  price between different purchasers of commodities
  of like grade and qualitywhere the effect of
  such discrimination may be substantially to
  lessen competition or tend to create a monopoly,
  or to injure, destroy or prevent competition..

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Evaluating A Competitive Threat
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Competitive price or low cost product entry
If you respond, is competition willing and able
to reestablish the price difference?
Is your position in other markets at risk?
Respond
Accommodate or Ignore
Is there a response that would cost less than the
preventable sales lost?
No
No
No
Yes
Yes
Does the value of the markets at risk justify the
cost of response?
Yes
No
Will the multiple responses required to match a
competitions cost less than the preventable sales
loss?
No
Yes
Yes
Respond
Respond
Source Figure from How to Manage an Aggressive
Competitor by George E. Cressman, Jr. and
Thomas T. Nagle from BUSINESS HORIZONS 45
(March-April 2002) p. 25. Reprinted with
permission from Elsevier.
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Competitive Bidding
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• Certain groups do bidding
• Governments
• Large companies (using preferred suppliers) bid
  for
• a. Non-standard material
• b. Complex designs and difficult manufacturing
  methods

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Types of Bidding
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• Closed bidding Suppliers submit a written bid on
  a specific contract and all bids are opened
  simultaneously and often job goes to lowest
  bidder
• But not always.
• Open bidding Auction reverse auction bidding
• The goal is to push the price down.
• Sometimes it has a negative effect because it
  brings out sensitive financial standings between
  competitors.
• The result can cause distrust between supplier
  and buyer.

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Strategy for Competitive Bidding
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• 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.

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Strategic Approach to Reverse Auctions
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• Reverse auctions are used to
• Purchase commodity products at lowest price
• Tempt suppliers to sacrifice their profit margins
  in the heat of bidding
• To minimize risk of winning an unprofitable bid,
• Carefully estimate true incremental cost of
  project
• Include costs associated with special terms
• Technical
• Marketing
• Sales support
• This analysis should result in a walk-away
  price.

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Strategic Approach to Reverse Auctions cont.
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• To cope with a reverse auction
• Convince buyer not to initiate the auction
  because you have a unique value proposition and
  will not participate in auction.
• Manage the process. Influence the bid
  specifications and vendor qualifications.
• Walk away and refuse to participate.
• This approach defines winning as only doing those
  bids that are profitable.