Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Benefits of a Particular Product Functional benefits are the design characteristics that might be attractive to technical personnel. Operational benefits are durability and reliability, qualities desirable to production managers. Financial benefits are favorable terms and opportunities for cost savings, important to purchasing managers and controllers. Personal benefits are organizational status, reduced risk, and personal satisfaction.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations A broad perspective needed in examining the costs a particular alternative may present for the buyer. Rather than making a decision on the basis of price alone, organizational buyers emphasize the total cost in use of a particular product or service. Customers’ Cost-in-Use Components

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Fig Key Components of the Industrial Pricing Process There is no easy formula for pricing an industrial product or service. The decision is multidimensional. The each interactive variable assumes significance.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Price Objectives The pricing decision must be based on objectives congruent with marketing and overall corporate objectives. The marketer starts with principal objectives and adds collateral pricing goals: 1.Achieving a target return on investment, 2.Achieving a market-share goal, 3.Meeting competition.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations The equation highlights how the relative perceived values of two competing offerings are compared. The premium price differential, or perceived relative value, can be broken down into components based on each important attribute: 1.the value of the attribute to the buyer, 2.the perception of how competing offerings perform on that attribute. Relative Perceived Value of Two Product Offerings

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Price Elasticity of Demand The rate of percentage change in quantity demanded attributable to the percentage change in price. Factors of price elasticity, –The ease with which customers can compare alternatives. –The importance of the product in the cost structure. –The value that the product represents to a customer.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Target costing features a design-to-cost philosophy that begins by examining market conditions: –Identifies and targets the most attractive market segments. –Determines what level of quality and types of product attributes will be required to succeed. Target Costing

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Cost Classification System Goals 1.Properly classify cost data into their fixed and variable components. 2.Properly link them to the activity causing them.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Analysis of Cost Concepts 1.Direct traceable or attributable costs. 2.Indirect traceable costs. 3.General costs.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Sources of the Experience Effect 1.Learning by doing. 2.Technological improvements. 3.Economies of scale.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Under certain conditions, followers into a market may confront lower initial costs than did the pioneer. By failing to recognize potential cost advantages of late entrants, the business marketer can dramatically overstate costs differences. Selected Cost Comparison Issues: Followers Versus the Pioneer

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Pricing New Products Skimming –Appropriate for a distinctly new product, provides the firm with an opportunity to profitably reach market segments that are not sensitive to the high initial price. –Enables the marketer to capture early profits. –Enables the innovator to recover high developmental costs more quickly. Penetration is appropriate when there is 1.High price elasticity of demand, 2.Strong threat of imminent competition, 3.Opportunity for a substantial reduction in production costs as volume expands.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations The Rules of Competitive Strategy Never participate in a competitive engagement you cannot win. Always participate in competitive engagement from a position of advantage.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Developed by Cool Pictures and MultiMedia Presentations Competitive Bidding Closed bidding, often used by business and governmental buyers, involves a formal invitation to potential suppliers to submit written, sealed bids for a particular business opportunity. Open bidding is more informal and allows suppliers to make offers (oral and written) up to a certain date.