Industrial Pricing

BY
PRASAD KULKARNI
 Factors influencing pricing decision

Pricing objectives: these are derived from corporate

and marketing objectives.
1. Survival:
 due to intense competition a firm unable to sell its
products
 Reduce the price to sell the inventory
 Price is set to cover variable cost plus part of the
fixed cost.
 This is short term survival strategy
2. Maximum short term profits
 Companies estimate the market demand and costs at
alternative prices and select the price that gives
maximum current profits.
 Emphasis is on short term profit maximization
 Companies don’t consider competitors reactions and
legal implications.
Maximum short term sales:
 Maximizing the sales revenue the companies will have
growth in market share and also have profit maximization.
Market penetration
 Fix the price as low as possible
 Market is price sensitive
 Low price increase the sales
 Highest volume will reduce the production and
distribution costs leading to higher long term profits
 Low prices will discourage entry of potential competitors
Maximum market skimming
 Setting high price in the initial stage of the product
cycle.
 Market is less price sensitive.
 Company skims maximum revenue and profits
 After some time prices are lowered
 Assumption different prices are charged for different
segments at different times.
 Risk involved is that high profits resulting from high
prices will attract entry of competitors.
Product- Quality leadership
- Produce superior quality product and charges slightly
higher price than the competitors price.
2. Demand analysis.
 The basic purpose of estimating the demand curve is to
find out to what extent the demand for a product
changes with the changes in prices.
 The demand curve indicates whether buyers are less
price sensitive ( inelastic demand) or more price
sensitive( elastic demand)
 The demand curve if hardly changes with small change
in the price then the demand is inelastic and if changes
significantly changes with small change in the price then
the demand in elastic.
The price elasticity of demand is determined by the
following formula

Price elasticity of demand =

Conditions determining price elasticity of demand
1. There are few competitors
2. No availability of substitutes products from other
industries
3. The buyers think that the higher prices are justified
by normal inflation or changes in government
policies on excise duty or sales tax.
 Demand for many industrial products is relatively
inelastic or less price sensitive
 The demand is also inelastic for those products
which are c class products in ABC analysis.
3. Cost benefit analysis.
 Analysis of benefits received and the cost incurred by
the target customers in purchasing and using the
product.
 Benefits can be categorized into hard and soft
benefits
 Hard benefits refer to the physical attributes of the
products such as production rate of a machine,
rejection rate of component etc…
 Soft benefits includes company reputation, customer
service, warranty period customer training etc…
 For industrial customers costs include not only price
but many , other expenses ( transportation,
installation, energy usage, repair and maintenance)
that are incurred in purchasing and using the
product
 While buying capital items buyer can use the
lifecycle concept by estimating the total cost of
the product over its life span.
- Life cycle costing includes the price, freight, transit
insurance, maintenance energy, material and labor
costs over the useful life of the product.