Pricing in B2B Marketing Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

What is Price? Strategic element of marketing mix Indication of value or worth of something Without it, transactions could not take place Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Perceived Value and Evaluated Price Value Based vs. Cost Based Pricing Value Based Pricing - difficult to establish Cost Based Pricing - easy and often mistakenly used Costs important in determining profit levels Beyond this, cost has little to do with price Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Value elements Product quality Process quality of the suplier Technical capabilites of the supplier Delivery timing Pre-sales services During sales services After sales services Trust Supply flexibilites Cooperation Communication Ease of doing business Return polices Responsiveness Frequency of customer visits

Price is critical for B2B buyers Roughly 6 in 10 B2B buyers from industrial sectors indicate that at least 60% of their purchase decisions are dominated by the price of the product, In all, price dominates in 55% of purchases, relatively unchanged from 57% in a similar study conducted in 2011. Interestingly, buyers are now conducting more extensive research for smaller purchases. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Elements of the Offering: The Total Offering Elements of the Offering: Product Service Image Availability Quantity Evaluated Price Suppliers creatively combine components of the total offering that contribute to value for specific customers. Components will vary depending on specific customer needs and the customer’s cost structure. The customer perceives price as a cost in its offering. While some customers will be able to directly fund purchases, others will require financing assistance (GE Credit Corporation finances customer purchases.) Other customers may require JIT delivery while others may find value in the brand or image of a particular supplier, particularly if that image can add value to the final product (Intel Inside). Exhibit 10-1 Value Activities Value Enabling Value Creating Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Maximum/Minimum Price Exhibit 10-5 Attributable cost per unit $ Equivalent Value Competitor’s Offering Minimum Price per Unit Competitor’s Price Maximum Price per Unit Customer view – Maximum worth of product Cost Acceptable Price Range Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Contribution Margin Difference between ongoing costs and ongoing revenue Represents portion of revenue that contributes to: Fixed Costs Indirect Costs Profit Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Supply, Demand, Pricing Demand Supply Price Quantity Exhibit 10-7 Elasticity at P1Q1 (Slope of demand curve) Q1 Quantity Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Economic Fundamentals of Price Demand levels differ at different levels of price Changes in price yield reaction from customers Changes in price yield reaction from competitors Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Strategic Purposes of Pricing Achieving target level of profitability Building good-will or relationships (in a market with certain customers) Penetration of a new market or segment Maximizing profit for a new product Keeping competitors out of an existing customer base Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Tactical Purposes of Pricing Winning business of new, important customers Penetrating a new account Reducing inventory levels Keeping business of disgruntled customers Encourage customer trials Encourage purchase of complementary products Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Market Skimming and Market Penetration Pricing Skimming: Charging relatively high prices that take advantage of early adopters’ strong desire for the product. Penetration: Charging relatively low prices to entice as many buyers as possible into the early market. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Market Conditions Necessary for Success in: Skimming and Penetration Perception must reflect high price Market is inelastic Sustainable market advantage Competitive market entry blocked Production levels profitable at lower volumes Penetration Market somewhat elastic Low price acts as barrier Economies of scale are necessary Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Pricing Decision Process Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Hypothetical Example: Competitive Bidding Cost Bid Profit Probability of Winning Bid Expected Profit $20,000 $0 .2 $22,000 $2,000 .5 $1,000 $24,000 $4,000 .7 $2,800 $26,000 $6,000 $3,000 $28,000 $8,000 .4 $3,200 $30,000 $10,000 .3 $32,000 $12,000 $2,400 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining a Bid Price Expected Profit at a Given Price ØE(PF) = PW(Pr) x PF(Pr) Where: ØE(PF) = Expected profit ØPW(Pr) = Probability of winning the bid at price Pr ØPF(Pr) = Profit at price Pr Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Final Negotiation Considerations Who has the authority to make final decisions? What are the bargaining styles of participants in bargain decision? Is bargain perceived as transaction, relationship or both? What evaluated price range is the customer expecting? Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall 1-20 Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 20