Transcript Document

Chapter 10
Pricing in Business-to-Business Marketing
Prepared by John T. Drea, Western Illinois University
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Pricing Basics
• Fundamentally, price is an indicator of
the worth of a product.
– Price needs to be set at a level that
indicates that the benefits are worth the price,
indicates that the customer can afford the price,
the customer cannot obtain more value
from some other supplier’s offerings.
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Exhibit 10-1 Components of the Offering
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Cost-Based vs. Value-Based Pricing
Cost-Based Pricing
Value-Based Pricing
Price is set by calculating
the cost of an offering,
then adding a standard
percentage profit.
Price is set based on
perceived customer value.
Cost-Based Price Issues
•Costs depend on volume.
•Costs assigned by
standard rates may have
no relationship to actual
costs.
•Price has no relationship
to customers’ perceptions
of the offering’s worth.
Value-Based Price Issues
•More difficult to implement
than cost-based pricing.
•Need to establish the
evaluated price (the price of
the offering from the
customer’s perspective
after all costs associated
with the offering are
evaluated).
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Maximum
Price
The highest price a supplier can
charge for a product or service
Minimum
Price
The price that covers the
supplier’s relevant costs
Key Points:
If there is no competition, maximum price is the point
where benefits just barely exceed the evaluated price.
To build a relationship, a fair price is needed. “Fair” is a
function of customer perceptions of the offering value.
Competitor prices and total benefits delivered constitute
a reference points in determining what is a fair price.
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Exhibit 10-3 Customer’s Perception of
Value and Evaluated Price
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Value-Cost Model of Pricing
• Need to analyze what activities subtract the
most from each customer’s profitability.
• At the same time, we need to analyze how
important a product is to the customer’s
creation of value.
• This indicates what each buyer can afford
and how sensitive the customer is likely to be
to price changes.
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Exhibit 10-4a Value-Cost Model for Analyzing Customers
Management and infrastructure…. Value score:
Technology development………… Value score:
Other overhead……………………. Value score:
Delivery &
customer
service
Sales
Marketing
Value
score:
Value
score:
VC%
FC%
VC%
FC%
FC%
FC%
FC%
Operations
Supply
logistics
Materials
Value
score:
Value
score:
Value
score:
Value
score:
VC%
FC%
VC%
FC%
VC%
FC%
VC%
FC%
Value score: Contribution to value for customer’s customer
1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)8
Exhibit 10-4b Value-Cost Model for Analyzing Customers
Management and infrastructure…. Value score: 1
Technology development………… Value score: 3
Other overhead……………………. Value score: 3
FC% 15%
FC% 5%
FC% 20%
Delivery &
customer
service
Sales
Value
score: 1
Value
score: 3
Value
score: 3
Value
score: 1
Value
score: 2
VC% 10%
FC% 25%
VC% 0%
FC% 10%
VC% 0%
FC% 5%
VC% 70%
FC% 20%
VC% 10% VC% 10%
FC% 0% FC% 0%
Marketing
Operations
Supply
logistics
Materials
Value
score: 3
Value score: Contribution to value for customer’s customer
1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)9
Exhibit 10-5 Maximum and Minimum Price
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Exhibit 10-6 Effect of Price Reductions on
Cost Coverage
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Exhibit 10-7 Demand and Supply Curves
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Relevant Costs
must meet the following four criteria
Resultant
Costs
Realized
Costs
Forwardlooking
Incremental
Costs
Avoidable
Costs
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Relevant Costs:
On-going revenues must pay for on-going costs
Resultant
Costs
Costs that result from the decision
Costs that will be incurred for the
next units of product sold when
the decision is implemented
Realized
Costs
Forwardlooking
Incremental
Costs
Actual costs incurred
Costs that would not be incurred
if the decision were not made to
launch the offering.
Avoidable
Costs
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Lessons to be learned on the economic
fundamentals of price
Lesson 1: Demand levels differ at different price
levels. Each segment will have a different degree of
price sensitivity.
Lesson 2: Price changes trigger customer reactions.
In the short-term, these reactions may be constrained
by customers’ situations.
Lesson 3. Price changes trigger reactions from
competitors.
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Several Marketing Objectives Addressed by Pricing
• Strategic Purposes
– Achieve a target level
of profitability
– Build goodwill in a
market
– Penetrate of a new
market or segment
– Maximize profit for a
new product
– Keep competitors out
of an existing
customer base
• Tactical Purposes
– Win new and important
customer business
– Penetrate a new
account
– Reduce inventory
levels
– Keep business of
disgruntled customers
– Encourage product trial
– Encourage sales of
complementary
products
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Introductory Pricing Strategies
Penetration
Pricing
Charging relatively low prices to entice
as many buyers as possible into the
early market. Penetration pricing can
assist in obtaining a dominant market
share – an excellent defense to future
competition.
Price
Skimming
Charging relatively high prices that
take advantage of early adopters’
strong desire for the product.
Skimming is most effective when an
offering has significant patent
protection and offers significant value
at the skim price.
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Introductory Pricing Strategies
Penetration
Pricing
Conditions for skimming:
•Offering quality and image support the
higher price
•Small volume production costs allow
profits at low sales volume
•Sufficient number of adopters at skim
price to justify effort
Price
Skimming
Conditions for penetration:
•Market must be price sensitive
•Production and distribution costs must
fall as volume increases (economies of
scale)
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Managing Pricing Tactics
Bundling
Selling several products and/or services
together as one
Discounts &
Allowances
Reductions in price for a special reason
(but some customers can get hooked on
them!)
Competitive
Bidding
Sealed bids involve private bids by
potential suppliers. In open bids,
competitors see each others bids.
Initiating
Price Changes
Need to react and change marketing
activities as events unfold, such as
changes by competitors or customers.
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Determining a Bid Price
Expected profit at a given price is calculated as
E(PF) = PW(Pr) x PF(Pr)
Where:
E(PF) = Expected profit
PW(Pr) = Probability of winning the bid at
price Pr
PF(Pr) = Profit at price Pr
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Exhibit 10-9 Hypothetical Example of Profit
Expectations in a Competitive Bidding Situation
Profit
Prob. of
Winning Bid
Expected
Profit
$20,000 $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
Cost
Bid
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Exhibit 10-10 Effect of an Industry Increase in Costs
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Exhibit 10-11 Two Types of Negotiating
Situations in B2B Sales
Situation
Stand-alone
Transaction
Effective
bargaining
styles
Effective
approach
Balanced between
Transaction and
Relationship
Competitive;
Problem solving
Problem solving;
Compromising
Use of leverage
Seek common
interests
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Know your customers’ needs
and their relative importance.
Know who has the authority to
make a final decision.
Preparation
in negotiation
is key
Know the bargaining styles of the
individuals involved in the
bargaining decision process.
Know whether the situation is
perceived as:
•A transaction,
•Part of a relationship, or
•A combination of the two
Know the price range anticipated
by the customer.
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Pricing and the Changing Business Environment
As time pressures increase, marketers must react quickly
to changes in customer needs or competitor actions. Two
examples are hypercompetition and the Internet.
Hypercompetition:
The Internet:
requires constant collection
of information on customer
value-cost models and
paying attention to your
customers’ customers and
their perceptions of value.
Improves communication,
increases both buyers and
marketers preparation. The
Internet also facilitates online auctions – this is good
for commodities, but can
minimize relationships for
other products.
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