Pricing and Negotiating for Value Chapter Fourteen Pricing and Negotiating for Value

Learning Objectives What is Price The Nature of Competitive Markets A model for price Supply and demand The Nature of Competitive Markets Four market models Issues in Price Management Key decisions in managing price

What is Price Price is the amount of money paid by a buyer to a seller for a particular product or service. On the seller side – price captures the focus of accountants, market managers, operation managers, sales staff, and pricing specialist. On the buyer (customer) side, price is the aim of buyers seeking value. Customers’ perception of value is reflected in the price they are willing to pay Customer perceived value is the difference between total customer value and total customer cost of a market offering relative to those of competing offers.

A model for price Cross elasticities Customer value perceptions 1 Demand Factors Elasticity of demand Cross elasticities Customer value perceptions 1 Cost Factors Costs now Anticipated costs Economic objectives 2 Trade Factors Power in the channel Traditions and roles Margins 5 Strategy Issues Target market selection Product positioning Price objectives Marketing program 4 Competitive Factors Structure of competition Barriers to entry Intent of rivals 3 Legal Factors Vertical restrictions Price discrimination 6 Evaluation and Formation of Prices & policy

Pricing Issues: Why Pricing is Difficult Objective & Explicit Subjective and Interpretive DEMAND FACTORS (How much do customers want) COST FACTORS (Actual outlays) STRATEGY ISSUES (Pricing objectives) COMPETITIVE FACTORS (Rivals’ prices) TRADE FACTORS (Channel power) LEGAL FACTORS (Restrictions and discrimination)

Supply and Demand The scissors of intersecting supply and demand functions Demand Function – a downward-sloping line that represents the tendency that as price declines, the demand for purchase increases. Differentiate between elastic (flat – price sensitive) & inelastic demand (steep – less sensitive) Supply Function – slope upward; represents suppliers’ motivation to increase supply as prices increase. The equilibrium price and quantity = the intersection of the supply and demand curves = the price at which sellers are willing to fill the market’s demand

Supply and Demand Price Supply Demand Quantity

The Nature of Competitive Markets Four Market Structures: Pure competition Oligopoly Monopolistic competition Monopoly

The Nature of Competitive Markets Pure competition Large number of small firms Homogenous products Freedom of entry/exit Least likely to be encountered in the real world Most attractive to the buyer

The Nature of Competitive Markets Oligopoly A few (often large) sellers of similar products Many business markets are oligopolies The most distinctive characteristic: kinked demand curve (very elastic above the kink, very inelastic below the kink, and then each firm can quickly notice and respond to competitive actions, prices tend to stick at or near the kink) Least likely to compete on the basis of price because oligopolies are especially susceptible to price wars

The Nature of Competitive Markets Monopolistic competition A large number of differentiated sellers – such as corporate training companies, custom marketing research firms, and industrial distributors The actions of one firm have a smaller effect on others Each seller brings some unique competency to the market and offers distinctively valued services and products Profit maximization model is illustrated by this market structure when MR=MC

The Nature of Competitive Markets Monopoly A single seller; most attractive model to a seller In these days of global competition, any true monopoly (single seller) is highly unlikely. Only government is likely to be a true monopoly (driver’s license, permits, etc.) or the grantor of monopolies (phone, cable).

Market Structures Types of situations Important dimensions Pure Competition Oligopoly Monopolistic Competition Monopoly Uniqueness of each firm’s product None Some Unique Number of competitors Many Few Few to many Size of competitors (compared to size of market Small Large Large to small Elasticity of demand facing firm Completely Elastic Kinked demand curve (elastic and inelastic Either Elasticity of industry demand Inelastic Control of price by firm Some (with care) Complete

Key Decisions in Managing Price Determine pricing strategy – Develop specific approach to achieve price objectives Determine channel intermediary prices, costs and margins Determine single product and product line pricing - Develop pricing structures for substitute and complementary products Determine whether to participate in bidding and negotiation for sales Establish a pricing system - Based on the 4 C’s : Costs, Customers, Competitors, and Channels

Determine pricing strategy Price objectives might be: To increase profitability by 12% over the next year To thwart the efforts by competitors to gain a foothold in the market To get competitors to accept us a price leader To restore order in a chaotic market To increase market share to 17% A pricing strategy capitalizes on the unique strengths of the enterprise and the opportunities in the market To gain market share by concentrating on small users served by our full-line distributors To build customer trust by reducing prices on products having highly visible cost reductions To win customers from competitors by bundling items at a low total price To reduce inventory of displaced and remanufactured products without damaging brand image or trade relations

Determine channel intermediary prices, costs and margins Reseller margins Too high: users forgo the benefits of the product, and factory sales suffer. Too low: intermediary selling effort, service, stocking, and so on may deteriorate, causing end user frustration and eventually a switch to products of another manufacturer Push or Pull – Reliance on resellers to differentiate the brand or not Pull: direct communication with end users to differentiate the product through the media; will squeeze reseller margins and users will benefit from low price Push: differentiation performed by channel; support and rightly compensate the differentiation efforts of the channel partners

Determine single product & product line pricing Develop pricing structures for substitute and complementary products A product line – a group of products that are related in purchase or use Substitute products may replace others of the same or another producer; the pricing tends to be driven largely by cost factors Complementary products (used in combination); price the most attractive, or driver product low and seek high margins on parts, consumables, or services

Determine whether to participate in bidding and negotiation for sales Administered prices – set by a seller and offered on a take-it or leave-it basis Competitive biding – asks the suppliers to offer their best deals and selects the best of the best as a designated point in time buyers take a proactive role in pricing Sales to government often involve bid pricing Negotiation – involves two-way communication and problem solving to come to mutually agreeable terms

Establish a pricing system Price is a critical element of marketing strategy Enough information on costs, customers, competitors, channel policy and the law