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

 Strategic element of marketing mix  Indication of value or worth of something  Without it, transactions could not take place 2 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

 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 4

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

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

 Difference between ongoing costs and ongoing revenue  Represents portion of revenue that contributes to: o Fixed Costs o Indirect Costs o Profit 7 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 9 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 10 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 11 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. 12 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 13 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

 Bundling  Discounts and Allowances  Competitive Bidding  Initiating Price Changes 14 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 16 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? 18 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall1-19 Copyright © 2009 Pearson Education, Inc. 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.