1. Pricing and Negotiating for Value
Chapter Fourteen
Pricing and Negotiating for Value

2. 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

3. 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.

4. 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

5. 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)

6. 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

7. Supply and Demand
Price
Supply
Demand
Quantity

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

9. 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

10. 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

11. 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

12. 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).

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

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