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Business-to-Business Marketing Pricing Strategies in Industrial Markets

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Business-to-Business Marketing Pricing Strategies in Industrial Markets Haas School of Business UC Berkeley Fall 2008 Week 3 Zsolt Katona * * * Stock prices ... – PowerPoint PPT presentation

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Title: Business-to-Business Marketing Pricing Strategies in Industrial Markets


1
Business-to-Business MarketingPricing Strategies
in Industrial Markets
  • Haas School of Business
  • UC Berkeley
  • Fall 2008
  • Week 3
  • Zsolt Katona

1
2
Stock prices
3
Prediction Market
4
Todays Agenda
  • Rohm and Haas case discussion
  • Signode Industries case discussion
  • On pricing in general
  • B2B pricing three common contract types

5
Overview
  • An overview of pricing strategies
  • Basics
  • Pricing objectives
  • Common pricing methods
  • Demand-based pricing
  • Advanced pricing
  • 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

6
Basics
7
Pricing objectives
  • Survival
  • Maximum current profit
  • Maximum current revenue
  • Maximum growth
  • Predatory pricing
  • Price signaling - image building
  • Maximum long term profit

8
Common pricing methods
  • Mark-up pricing
  • Target return pricing
  • Perceived value pricing
  • Going rate pricing
  • Sealed-bid pricing

9
Price pressures
10
Demand-based pricing
  • Elasticity of demand
  • 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)

11
Advanced pricing
12
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).

13
Bundling
  • Two movies, two movie theaters

At what price should the movies be sold to the
theaters if the seller cannot discriminate? PA
PB What is the optimal bundle? PAB

14
Behavioral pricing
When people process information, they may arrive
to different conclusions depending on how
the information is presented. Framing or
context effects - Peoples 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). - Peoples attitude towards risk
depends on whether the purchase is framed as
a loss or a gain compared to status quo.
15
Prospect Theory
Lottery, L (x, y, p) with E(L)px(1-p)y
16
(No Transcript)
17
Dynamic Pricing
  • Objective
  • where T is the time horizon r is the discount
    rate

18
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

19
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).

20
Cooperative pricing
  • Cooperative pricing methods
  • Round table collusion (e.g. Telecom)
  • Umbrella pricing and price leadership (e.g.
    Signode)

21
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

22
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.

23
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

24
MFC The sellers perspective
  • Pros
  • Seller becomes a tougher negotiator (tiger)
  • Reduces the customers 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
  • Sellers rival can get the sellers customer
    easier
  • It is harder for the seller to get his rivals
    customer

25
MFC The buyers perspective
  • Pros
  • Ensures buyers rivals are not at a cost
    advantage
  • Buyer doesnt look bad if other competitors make
    a better deal
  • Buyer can benefit from other buyers superior
    negotiating skills
  • Cons
  • Buyer loses incentive to negotiate (pussycat)
  • With other buyers having MFCs it is harder to get
    a special deal

26
2. Meet-the-Competition Clause
  • MCC is a contract that gives the seller an option
    to retain the buyers 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.

27
Example of MCC
  • Miami Dolphins sold for only 138 million to
    Huizenga who had an MCC on the team.

28
MCC The sellers 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 others business. It is a
    collusion device.

29
MCC The buyers 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.

30
MFCs and MCCs 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.

31
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 didnt 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 suppliers fixed costs into
    variable costs (reverse for the buyer).
  • risk sharing between buyers and sellers

32
Take-or-pay contracts buyers perspective
  • Pros
  • Reduces risk to the supplier, in return for which
    buyer can ask to pay less
  • Reduces the incentive of the buyers rival to
    come after the buyers customer (buyer becomes a
    tiger).
  • Con
  • Works like nuclear deterrence price war is
    devastating if deterrence fails

33
Conclusion
  • Pricing is important and easy to make mistakes
  • Short term decision, but long term objectives
  • RH Value pricing
  • Signode Price leadership issues
  • Typical B2B pricing contracts
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