BUS 539 B2B Marketing

Week6 - Pricing
Class Notes
Dr. Koray ANDIR
koraycandir@yahoo.com

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 suppliers offerings.

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
offerings 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 customers perspective after all
costs associated with the offering are
evaluated).

Price Range
Maximum Price

The highest price a supplier can

charge for a product or service

Minimum Price

The price that covers the

suppliers 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.

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

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

Managing Pricing Tactics

Bundling

Discounts &
Allowances

Competitive
Bidding

Initiating
Price Changes

Selling several products and/or services together as

one

Reductions in price for a special reason (but some

customers can get hooked on them!)

Sealed bids involve private bids by potential suppliers.

In open bids, competitors see each others bids.

Need to react and change marketing activities as

events unfold, such as changes by competitors or
customers.
8

Alternate Pricing Responses

Adopt a Discount Strategy
slash all costs to the bone
sell only naked solutions with minimal services

Turn to Risk Sharing and Gain Sharing

Agreements
Employ Revenue/Yield Management
Utilize Game Theory
Decline to Serve the Segment