 Strategic element of Marketing Mix  Indication of value or worth of something  Without, transactions could not take place

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

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). Value Activities Value Enabling Value Creating Exhibit 10-1

 Price paid/value exchanged at purchase  Location convenience  Handling and storage costs for customer  Inventory financing/holding costs  Environmental impact/disposal cost

Offering A $ Equivalent Value Total Benefit s Offering B Total Benefit s Evaluated Price Evaluated Price Value “A” has more value; customer chooses “A” though “B” has more total benefits Exhibit 10-4

Attributable cost per unit Offering A $ Equivalent Value Competitor’s Offering B Offering A Minimum Price per Unit for A Competitor’s Price for B Maximum Price per Unit for A Customer view – Maximum worth of A Cost Acceptable Price Range Exhibit 10-5

Meet Following Four Criteria ResultantRealized Forward Looking Incremental Avoidable

 Costs that result from the decision

 Actual costs incurred

 Costs that will be incurred after the next units of product sold when the decision is implemented

 Costs that would not be incurred if the decision were not made to launch the offering

 Difference between ongoing attributable costs and ongoing attributable revenue  Represents portion of revenue that contributes to: o Fixed Costs o Indirect Costs o Profit

$ Price Cut “A” -- this is still OKPrice Cut “B” Allocated Cost of Mgr’s Salary— “unavoidable” Attributable Costs Original Price New Price $6500 Original Profit Minimum Price – $6000 Below $6000, you lose more $ with each additional unit sold Contribution to Cover Mgr’s Salary $10,000 $7,000 $6,000

Price Quantity P1 Q1 Elasticity at P1Q1 (Slope of demand curve) Demand Supply Exhibit 10-7

 Demand levels differ at different levels of Price  Changes in Price yield reaction from customers  Changes in Price yield reaction from competitors

 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

 Winning Business of New, Important Customer  Penetrating a New Account  Reducing Inventory Levels  Keeping Business of Disgruntled Customers  Encourage Customer Trial  Encourage Purchase of Complementary Products

 Pricing is situational  Customer perceptions of value change  Different market segments attracted at different stages in life cycle  Competitive environment changes  Role of offering in both marketer’s and customer’s organization will change

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.

Skimming  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

 Bundling  Discounts and Allowances  Competitive Bidding  Initiating Price Changes

CostBidProfit Probability of Winning Bid Expected Profit $20,000 $0.2$0 $20,000$22,000$2,000.5$1,000 $20,000$24,000$4,000.7$2,800 $20,000$26,000$6,000.5$3,000 $20,000$28,000$8,000.4$3,200 $20,000$30,000$10,000.3$3,000 $20,000$32,000$12,000.2$2,400 Exhibit 10-10

Expected Profit at a Given Price o ØE(PF) = PW(Pr) x PF(Pr) Where: o ØE(PF) = Expected profit o ØPW(Pr) = Probability of winning the bid at price Pr o ØPF(Pr) = Profit at price Pr

Effect of an Industry Increase in Costs Price Quantity P1 Q2 S1 S2 P2 Q1 Exhibit 10-11

Exhibit 10-12

 Preparation › Data Collection and Analysis › Determination of Negotiation Strategy  Information Exchange › Elicit Information not yet obtained › Test Hypothesis about nature of situation  Engage in Negotiation › Opening › Discussion positions › Concessions › Closing  Obtain Comitment Exhibit 10-13

 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 customer expecting?

 Time Compression  Hyper Competition  Internet