1 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Dr. Dawne Martin MKTG 550 – Business Marketing October 18, 2012

 Important Dates › Exam 2: Thursday, October 25, Chap 5-10 › Case: Makrolan – Due Nov. 1 › Project 2 – Due Nov 8 › Case: Dow Chemical – Due: Nov. 15 › For Next Time: Read – Value-Based Marketing & Pricing  Understand and apply perceived value, its relationship to the total product offering and its impact on B2B pricing  Apply the concept of Economic Value to Customer (EVC) to example  Review pricing approaches & considerations  Review issues of bidding & negotiations in B2B price Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 2

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

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

 Price paid/value exchanged at purchase  Location convenience  Handling and storage costs for customer  Inventory financing/holding costs  Environmental impact/disposal cost 5 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

EVC = Competitors Lifecycle Cost less Our Start-up Costs less Our Post-Purchase Costs less Our Incremental Value Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 8

 Competitor’s Lifecycle Costs : total lifecycle costs of customer’s benchmark product, including price, start-up costs, post-purchase costs  Our Start- up costs: one-time cost of switching from competitor’s to our product  Our Post-Purchase costs: total cost of using and maintaining the firm’s product until replaced  Our incremental Value – dollar value to the customer of any benefits provided by our product that are not provided by the competitor’s product Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 9

 Our Printer  Price = $250  Ink Cartridge Cost: $85  Cartridge Life: 6 months  Printer Life: 5 years  Competitor’s Printer  Price = $150  Ink Cartridge Cost: $85  Cartridge Life: 2 months  Printer Life: 3 years Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 10 What is the EVC of our printer relative to competitor printer?

Current Situation  Repair Costs = $2 million/year in repair costs  Overtime costs = $500,000/year  Service contract = $1 million per year Our Proposal  Purchase Price = $4.5 million  Reduction in current costs = 50%  Additional savings = 1% reduction in variable costs Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 11

Meet Following Four Criteria ResultantRealized Forward Looking Incremental Avoidable 12 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

 Resultant: Costs that result from the decision  Realized: Actual costs incurred  Forward Looking Incremental: Costs that will be incurred after the next units of product sold when the decision is implemented  Avoidable: Costs that would not be incurred if the decision were not made to launch the offering 13 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

 Difference between ongoing attributable costs and ongoing attributable revenue  Represents portion of revenue that contributes to: o Fixed Costs o Indirect Costs o Profit 14 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

Price Quantity P1 Q1 Elasticity at P1Q1 (Slope of demand curve) Demand Supply Exhibit Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

 Demand levels differ at different levels of price  Changes in price yield reaction from customers  Changes in price yield reaction from competitors 17 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

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

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

 Bundling  Discounts and Allowances  Competitive Bidding  Initiating Price Changes 23 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

Effect of an Industry Increase in Costs Price Quantity P1 Q2 S1 S2 P2 Q1 Exhibit Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

 Time Compression  Hyper Competition  Internet 30 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall