1. Chapter 14: Pricing Strategy for Business Markets PowerPoint by:
Chapter 14:
Pricing Strategy for
Business Markets
PowerPoint by:
Ray A. DeCormier, Ph.D.
Central Ct. State U.

2. Chapter Topics
Understanding how customers value pricing is the essence of the pricing process. Chapter topics include:
The value-based approach for pricing
The central elements of the pricing process
How effective new product prices are established and the need to periodically adjust the prices of existing products
How to respond to a price attack by an aggressive competitor
Strategic approaches to competitive bidding

3. Customer Value in Business Markets
Customer Value in Business Markets
Customer Value
Benefits
Sacrifices
Core Benefits
Add-on Benefits
Acquisition Costs
Processing Costs
Usage Costs
Source: Adapted with modifications from Ajay Menon, Christian Homburg and Nikolas Beutin, “Understanding Customer Value in Business-to-Business Relationships,” Journal of Business-to-Business Marketing 12, No. 2 (2005), pp

4. Sacrifices = Total Costs
Sacrifices = Total Costs
Total Costs = Acquisition + Possession + Usage
Acquisition: Purchase price, transportation, administrative costs, errors, costs to evaluate supplier, expedition costs
Possession Costs: Finance, storage, inspection, insurances, taxes, internal handling
Usage Costs: Costs for ongoing use such as installation, training, field repairs, replacement, disposal

5. Customers’ Total Cost-in-Use Components
Customers’ Total Cost-in-Use Components

6. Differentiating through Value-Creation
If relationships are more valuable to customers than price and costs, then marketers need to emphasize unique add-on benefits around:
Building trust
Demonstrating commitment
Being flexible
Initiating joint ventures
Working on developing deeper relationships
These efforts enhance customer value & loyalty.

7. Differentiating through Value-creation
Differentiating through Value-creation
Research suggests that most companies offer similar services, however, the following seem to be more prominent.
1. Service support
2. Personal interactions
3. Supplier know-how
4. Ability to improve customer’s time to market
Moderate differentiating factors include:
1. Product quality
2. Delivery
3. Acquisition and operation costs

8. Key Components of the Price-Setting Decision Process
Key Components of the Price-Setting Decision Process
Fig. 14.2
No easy formula for pricing industrial product or service
Decision is multidimensional
Each interactive variable assumes significance
Set Strategic Pricing Objectives
Estimate Demand and the
Price Elasticity of Demand
Determine Costs and
their Relationship to Volume
Examine Competitors’ Prices and Strategies
Set the Price Level

9. Demand Determinants & Assessing Value
Demand Determinants & Assessing Value
There are a number of issues when considering demand:
Usage and importance of the product/service by various segments
Price Sensitivity (elasticity of demand)
Assessing Value: Competitive Value comparisons
Assume same product by 2 different competitors
Assume: (“A” charges $24 ; “B” charges $20);
Why might a buyer prefer “A” over “B”?
Could it be that buyer prefers “A” more than “B” because “A’s” total offering provides more value than “B”?

10. Define the key market segments
Fig A Value-Based Approach for Pricing
Define the key market segments
Isolate the most significant drivers of value
in customers’ business
Quantify the impact of your product or service
on each value driver in customers’ business
Estimate the incremental value created by your product
or service, particularly for those features that are
unique and different from competitors’ offerings
Develop pricing strategy and marketing plan
SOURCE: Adapted from Gerald E. Smith and Thomas T. Nagle, “How Much Are Customers Willing to Pay,”
Marketing Research 14 (winter 2002): pp

11. Elasticity Varies by Segments
Price elasticity measures how sensitive customers are to price changes.
Price elasticity of demand refers to rate of percentage change in quantity demanded to percentage change in price.

12. Elasticity of Demand Elastic Demand
Chapter 17
Elasticity of Demand
Elastic Demand
Consumers buy more or less of a product when the price changes
Inelastic Demand
An increase or decrease in price will not significantly affect demand
Notes:
Elasticity of demand can be measured by this formula: Elasticity (E) = percentage change in quantity demanded percentage change in price
If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary.
Unitary Elasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

13. Elasticity of Demand Price Goes... Revenue Goes... Demand is... Down
Chapter 17
Elasticity of Demand
Price Goes...
Revenue Goes...
Demand is...
Down Up
Elastic
Inelastic
Up or Down
Stays the Same
Unitary Elasticity
Notes:
If price goes down and revenue goes up, demand is elastic.
If price goes down and revenue goes down, demand is inelastic.
If price goes up and revenue goes up, demand is inelastic.
If price goes up and revenue goes down, demand is elastic.
If price goes up or down and revenue stays the same, elasticity is unitary.

14. Other Factors
Satisfied customers are less price sensitive therefore one strategy is to make our customers very satisfied so price isn’t as much of a determinant.
Switching costs is a consideration depending upon products. The more sophisticated and unique the product is, and the more vested interest (costs) in it is, the more apt for the customer to not switch.

15. Other Factors
End Use: How important is the product as in input into the total cost of the end product?
If cost is insignificant, then demand is inelastic.
End-Market Focus: Since demand for many industrial products is derived from the demand for the product of which they are a part, STRONG end user focus is needed.

16. Value-Based Segmentation
Some industrial product may serve different purposes for different markets.
Each segment may value the product differently.
By identifying applications where the firm has a clear advantage, and by understanding the value of it to each segment, marketer may be able to administer price differentiation in each segment.

17. Target Pricing & Costing
Many companies base price off of costs
Problem: Method is internally driven, not market driven
A better approach is to use Target Pricing
It starts by examining and segmenting the market
Determine what type, quality and attributes each segment wants at a pre-determined target price
Understand the perception of value to the target selling price
Then calculate costs considering margins

18. Cost Concept Analysis
Direct Traceable or Attributable Costs: All costs, fixed or variable, that are solely incurred for a particular product, territory, or customer (e.g., raw materials)
Indirect Traceable Costs: All costs, fixed or variable, that can be traced to a particular product, customer or territory (e.g., general plant overhead)
General Costs: Costs that support a number of activities not directly related to a particular product (e.g., administrative overhead, R&D)

19. Competition Competition establishes an upper limit on price.
Competition establishes an upper limit on price.
Price is only a component of the cost/benefit equation.
There are many ways to have a differential advantage other than price: advanced features, technical expertise, timely delivery and product reliability (zero defects) to name a few.
Service and support also have a differentiating affect.

20. Followers vs. Pioneers

21. Pricing Strategies 3 Major Pricing Strategies Follow the Crowd
Pricing Strategies
3 Major Pricing Strategies
Follow the Crowd
Price Skimming
Penetration Pricing

22. Price Skimming Appropriate for distinctly new products
Price Skimming is charging a high initial price
Price Skimming:
Appropriate for distinctly new products
Provides the firm with opportunity to profitably reach market segments not sensitive to high initial price
Enables marketer to capture early profits
Enables innovator to recover high R&D costs more quickly
Strategy: As the product goes through its product life cycle, the strategy is to lower the price in line with production and demand capacity.

23. Penetration Pricing High price elasticity of demand
Penetration Pricing is charging a very low initial price.
Penetration Pricing is appropriate when there is:
High price elasticity of demand
Strong threat of imminent competition
Opportunity for substantial production cost reduction as volume expands

24. Price Discrimination The Robinson-Patman Act of 1936:
Chapter 18
Price Discrimination
The Robinson-Patman Act of 1936:
“…holds that it is unlawful to ‘discriminate’ in price between different purchasers of commodities of like grade and quality…where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly, or to injure, destroy or prevent competition..”
Notes:
Six elements are needed for a violation of the Robinson-Patman Act to occur:
There must be price discrimination; that is the seller must charge different prices to different customers for the same product.
The transaction must occur in interstate commerce.
The seller must discriminate by price among two or more purchasers within a reasonably short time.
The products sold must be commodities or other tangible goods.
The products sold must be of like grade and quality.
There must be significant competitive injury.

25. Evaluating A Competitive Threat
Competitive price or “low cost” product entry
If you respond, is competition willing and able to reestablish the price difference?
Is your position in other markets at risk?
Respond
Accommodate or Ignore
Is there a response that would cost less than the preventable sales lost? No No
Yes No
Yes
Does the value of the markets at risk justify the cost of response?
Yes No
Will the multiple responses required to match a competitions cost less than the preventable sales loss? No
Yes
Yes
Respond
Respond
Source: Figure from “How to Manage an Aggressive Competitor” by George E. Cressman, Jr. and
Thomas T. Nagle from BUSINESS HORIZONS 45 (March-April 2002): p. 25. Reprinted with permission from Elsevier.

26. Competitive Bidding Certain groups do bidding Governments
Competitive Bidding
Certain groups do bidding
Governments
Large companies (using preferred suppliers) bid for:
a. Non-standard material
b. Complex designs and difficult manufacturing methods

27. Types of Bidding
Closed bidding: Suppliers submit a written bid on a specific contract and all bids are opened simultaneously and often job goes to lowest bidder…
But not always.
Open bidding: Auction & reverse auction bidding
The goal is to push the price down.
Sometimes it has a negative effect because it brings out sensitive financial standings between competitors.
The result can cause distrust between supplier and buyer.

28. Strategy for Competitive Bidding
Bidding is costly and time consuming.
Screen the project to make sure the contract is related to your core competencies and is one you can perform (profitably).
Price to a level that, hopefully, will allow you to win the contract but not bankrupt you.
Sometimes it is worth winning a contract even at a small loss if it can lead to bigger contracts.
The determinant is the switching costs involved for the buyer to bring on another vendor.

29. Strategic Approach to Reverse Auctions
Reverse auctions are used to:
Purchase commodity products at lowest price
Tempt suppliers to sacrifice their profit margins in the heat of bidding
To minimize risk of winning an unprofitable bid,
Carefully estimate true incremental cost of project
Include costs associated with special terms:
Technical
Marketing
Sales support
This analysis should result in a “walk-away” price.

30. Strategic Approach to Reverse Auctions con’t.
To cope with a reverse auction:
Convince buyer not to initiate the auction because you have a “unique value proposition” and will not participate in auction.
Manage the process. Influence the bid specifications and vendor qualifications.
Walk away and refuse to participate.
This approach defines winning as only doing those bids that are profitable.