Transcript chp6 - courses.psu.edu

CHAPTER 6
PRICE PLANNING AND
STRATEGY
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
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)
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:
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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).
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One cost element would be fixed cost. How does each company
determine how much fixed cost should be allocated to each product?
Solution:
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Competitors’ prices may be very different from yours. Study their
historical patterns of bidding.
Major Factors Influencing Price
Decision in Business Market
Internal factors
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Company objectives
Marketing mix value
Costs
Impact on other
products
Product
differentiation
External factors
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Buyers
Demand
Economic
considerations
Ethical
considerations
Competition
Suppliers
Government/legal
Pricing Methods in Business
Market
Marginal pricing (contribution pricing):
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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:
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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:
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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:
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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:
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A version of target ROI pricing in which all products are marked up by
the same percentage.
Pricing Across Product Life Cycle in
Business Market: Life-Cycle Costing
Introduction phase:
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Price skimming:
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Introductory price set relatively high, thereby attracting buyers
at top of product’s demand curve.
Market penetration pricing:
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Low price is used as an entering wedge.
Growth phase:
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Competitive pressure and lower prices.
Maturity phase:
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Stability in price competition.
Low cost strategy
Decline stage:.
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Lower variable cost.
Price-Leadership Strategy in
Business Market
Price-leadership strategy:
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.
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Competitive Bidding
Competitive bidding:
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Buyer sends inquiries (requests for quotations or
RFQs) to firms able to produce in conformity with
requested requirements.
Requests for proposals (RFPs):
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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:
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Government purchases requires formal andclosed
bidding.
Competitive bidding is open and informal.
Leasing in the Business Market
Advantages to buyer
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No down payment
No risk of ownership
Advantages to seller
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Increased sales
Ongoing business relationship with lessee
Residual value retained
Types of Lease Arrangements:
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Financial intuitions are the middlemen.
Large firms have leasing subsidiaries.
Direct-financing lease from the manufacturer.
Types of Business leases:
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Operating lease:
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Short-term and cancelable.
Direct Financing Lease:
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Long term and non-cancelable.
Pricing Discount Strategies in
Business Market
Trade Discount:
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Price discounts for the services performed by
the intermediaries.
Quantity Discounts:
Non-cumulative
 Cumulative
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Cash Discount
Geographical Price Adjustment
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.