1. PRICE PLANNING AND STRATEGY
CHAPTER 6
PRICE PLANNING AND STRATEGY

2. Important Topics of This Chapter
Pricing in Business-to-Business Market
Major Factors Influencing Pricing Strategy in Business Market
Implementation of Different Pricing Methods in Business Market
Life-Cycle Costing
Price-Leadership Strategy in Business Market
Bidding Strategies in the Business Market
Leasing in the Business Market
Pricing Discount Strategies in Business Market

4. Different Companies Implementing Different Pricing Objectives
Company Objective
Alcoa 20% ROI
American Can Maintain market share
General Foods 33% gross margin
National Steel Match the market
U.S. Steel 8% ROI after taxes
DuPont Target ROI, cost-plus
(continued)

5. Different Companies Implementing Different Pricing Objectives (cont.)
Take three different products and produce them by exactly the same process in three different companies.
Because companies use different pricing calculations:
Product prices will most likely vary by company.
Price difference usually will not be consistent.
Obviously, this is true if marketers use different strategic markups, but it also true of estimated cost (or even cost in production).
One cost element would be fixed cost. How does each company determine how much fixed cost should be allocated to each product?
Solution:
Competitors’ prices may be very different from yours. Study their historical patterns of bidding.

6. Major Factors Influencing Price Decision in Business Market
Internal factors
Company objectives
Marketing mix value
Costs
Impact on other products
Product differentiation
External factors
Buyers
Demand
Economic considerations
Ethical considerations
Competition
Suppliers
Government/legal

7. Pricing Methods in Business Market
Marginal pricing (contribution pricing):
Attempts to maximize profits by producing number of units at which marginal cost is just less than or equal to marginal revenue.
Economic value to the customer:
A higher price will be paid by buyers who perceive a greater value or benefit to them than what they would receive from buying a competitive product.
Break-even analysis:
The point at which a firm’s revenue will equal its total fixed and variable costs at a given price.
Target return on investment pricing:
An annual ROI target (i.e., ROI of 20% over cost). Typically done by a mix of individual product markups over cost that average the target ROI.
Cost-plus pricing:
A version of target ROI pricing in which all products are marked up by the same percentage.

8. Pricing Across Product Life Cycle in Business Market: Life-Cycle Costing
Introduction phase:
Price skimming:
Introductory price set relatively high, thereby attracting buyers at top of product’s demand curve.
Market penetration pricing:
Low price is used as an entering wedge.
Growth phase:
Competitive pressure and lower prices.
Maturity phase:
Stability in price competition.
Low cost strategy
Decline stage:.
Lower variable cost.

9. Price-Leadership Strategy in Business Market
One or a very few firms initiate price changes, with most or all the other firms in the industry following suit.
When price leadership prevails, price competition does not exist. The burden of making critical pricing decisions is placed on leading firm(s) and other simply follow the leader.

10. Competitive Bidding Competitive bidding:
Buyer sends inquiries (requests for quotations or RFQs) to firms able to produce in conformity with requested requirements.
Requests for proposals (RFPs):
It involves the same process, but here buyer is signaling that everything is preliminary and that a future RFQ will be sent once specifics are determined from the best proposals.
Closed Vs. Open Bidding:
Government purchases requires formal andclosed bidding.
Competitive bidding is open and informal.

11. Leasing in the Business Market
Advantages to buyer
No down payment
No risk of ownership
Advantages to seller
Increased sales
Ongoing business relationship with lessee
Residual value retained
Types of Lease Arrangements:
Financial intuitions are the middlemen.
Large firms have leasing subsidiaries.
Direct-financing lease from the manufacturer.
Types of Business leases:
Operating lease:
Short-term and cancelable.
Direct Financing Lease:
Long term and non-cancelable.

12. Pricing Discount Strategies in Business Market
Trade Discount:
Price discounts for the services performed by the intermediaries.
Quantity Discounts:
Non-cumulative
Cumulative
Cash Discount
Geographical Price Adjustment

13. Ten Don’ts of Successful Selling in Business Market
1. Don’t discuss with customers the price your company charges others.
2. Don’t attend meetings with competitors at which pricing is discussed (not even professional association meetings).
3. Don’t give lower prices to your company’s own subsidiaries.
4. Don’t enter into gentlepersons’ understandings with competitors on prices, terms of sale, discounts, market share, intent to bid, or customer terminations.
5. Don’t use one product as bait for selling another.
6. Don’t require a customer to buy a product only from you.
7. Don’t forget that individual states and other countries have antitrust laws.
8. Don’t disparage a competitor’s product without proof.
9. Don’t require reciprocal purchases.
10. Don’t hesitate to consult your company’s lawyer if you are unsure.