U N I T

SLM
5

Managing business
marketing channels and
pricing strategies(strategic
role of logistics, value and pricing)

Dr. Mithilesh
Pandey
 LECTURE OUTCOME
 Ability to analyze the logistics cost and the pricing
process in B2B.

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HTTPS://WWW.LOGISTICSMGMT.COM/ARTICLE/
MOBILITY_THE_STRONGEST_LINK_IN_CONNECT
ED_SUPPLY_CHAIN

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SUPPLY CHAIN FOR ELECTRIC MOTORS
Why Amazon and Flipkart are
trying to reduce the delivery
time?

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 STRATEGIC ROLE OF LOGISTICS
 Historically, logistics was viewed as a cost of doing business.

 Its function was to deliver higher productivity.

 Today, it is viewed as a critical strategic weapon against

competition for delivering products to the market in as efficient and
effective way that offers customers value.

 The result is loyal customers and more profitability.

 SALES-MARKETING-LOGISTICS
INTEGRATION
 Progressive firms have teams of sales, production,
logistics, information systems and marketing personnel.

 Sales calls are made by teams of specialists who contact

customers and offer logistical solutions to customer
problems.
 JIT SYSTEMS
 Just In Time systems originally applied to moving inventory through
the production process.

 The objective is to get the right part to the right place at the right time
in perfect condition (zero defects).

 JIT’s purpose is to relate production to purchase.

 Example: If 100 units are expected to be purchased, then produce 100

units (getting product to match market needs).

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 LOGISTICAL SYSTEMS

 Again, due to the interconnectedness of the logistical system,

almost no decisions can be made without evaluating the
effects upon other areas.
 Linkages determine how quickly companies can get their
product from production to market.
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 CONTROLLABLE ELEMENTS IN A
LOGISTICS SYSTEM

Source: Adapted from James R. Stock and Douglas M. Lambert, Strategic Logistics Management, 5th ed. (Homewood, Ill.: McGraw-Hill, 2000)
 PERFORMANCE VARIABLES

When managing the logistical system, two

measurements need to be considered:

1. Total distribution costs

2. Level of logistical services provided to customers

Trying to reduce distribution cost yet still provide

good services to the customer is a balancing act.

The approach is to use the Total-Cost or

Trade-Off method.
TOTAL COST OR TRADE-OFF APPROACH
 Total Cost or Trade-Off considers the effect of costs vs.
efficiency at all levels within the logistical system.

 The assumption is that a change at one stage will affect

something at another stage.

 The method is to consider the total cost, considering any

trade offs in performance or quality at each stage, then
assess its effect on other members while considering the
total cost (including abstract costs such as losing the
customer).
 Activity-Based Costing (ABC) is a technique
used to measure costs of performing specific
activities and trace those costs to:
1. Products
2. Customers
3. Channels that consumed the activity

 This method even traces costs to the customer

demanding certain services. For example…
 ABC CONTINUED
 For example, assume a customer wants daily JIT delivery,
but the inventory ordered is too small.
What would you do?

 You’d track the cost of that service to the customer

and you’d either:
a. Charge him extra for the service
b. Have him increase his inventory order to economic
feasibility, or
c. Drop him as a customer.
 TOTAL COST OF OWNERSHIP (TCO)
 Determines the total cost of acquiring and using an item from a
particular supplier.

 This approach identifies costs (often buried in

overhead/general expenses) that related to holding, poor
quality and/or delivery failure.

 Buyers using TCO to analyze those costs as part of the

purchase price can discern suppliers with an efficient
logistics system. They should have lower costs and lower
prices.
 B2B LOGISTICAL SERVICE
 Logistics is a service similar to quality and is used by
customers to measure performance.

 When quality between competitors and price are the

same, the next determinant may be logistical speed.

 Logistical service translates into product availability.

COMMON ELEMENTS OF LOGISTICS
SERVICE
 IMPACT ON SC MEMBERS
 Poor logistics result in higher inventory carrying costs to
distributors.

 Poor logistics implementation can result in inventory

shortages which can lead to customer dissatisfaction
(customer disengagement).

 Effective logistics allows distributors to compete effectively

since it allows them to be more valuable to their (mutual)
customers.
 IMPORTANCE OF INVENTORY
MANAGEMENT
 Inventories are needed because:

1. Production and demand not perfectly matched. Production

usually occurs in anticipation of demand.
2. Operating deficiencies in logistical system often result in
product unavailability.
3. Business customers cannot predict their product needs with
certainty.
 OBJECTIVE: ELIMINATE INVENTORY
 The objective of Total Quality Management and JIT
principles is to eliminate excess inventory.

 Current thinking is that inefficiencies in the system results in

excess/shortfall inventory.

 If there could be better forecasting, improved delivery and

zero manufacturing defects, the possibility to eliminate the
need for inventory is possible, especially due to certain
advances.
 SETTING THE PRICE
 This is one of the most difficult issues that face companies: What
is the right price to charge?

 There is no easy solution or formula for proper pricing.

 Pertinent considerations include:

1. Pricing & profit objectives
2. Demand determinants
3. Cost determinants
4. Competition
 KEY COMPONENTS OF THE
PRICE-SETTING DECISION PROCESSFig. 12.1

 No easy formula for pricing Set Strategic Pricing Objectives

industrial product or service

 Decision is multidimensional
Estimate Demand and the
 Each interactive variable Price Elasticity of Demand
assumes significance

Determine Costs and

their Relationship to Volume

Examine Competitors’ Prices and Strategies

Set the Price Level

 Price Objectives
 Pricing decision must be based on marketing and
overall corporate objectives.

 Marketer starts with principal objectives and adds

collateral pricing goals:
 Achieving target return on investment.
 Achieving market-share goal.
 Meeting competition.

 Other objectives include competition, channel

relationships and product-line considerations.
 ASSESSING VALUE
 Economic Value: Represents cost saving and/or revenue
gains when purchasing a product (instead of next best
alternative)

 Commodity Value: Value customers assign to features

that resembles competitive offerings

 Differentiation Value: Represents the value of features

that are unique and different from competitors
Fig 12.3 A Value-Based Approach for Pricing

Define the key market segments

Isolate the most significant drivers of value

in customers’ business

Quantify the impact of your product or service

on each value driver in customers’ business

Estimate the incremental value created by your product

or service, particularly for those features that are
unique and different from competitors’ offerings

Develop pricing strategy and marketing plan

SOURCE: Adapted from Gerald E. Smith and Thomas T. Nagle, “How Much Are Customers Willing to Pay,”
Marketing Research 14 (winter 2002): pp. 20-25.
I. Goal is to identify significant drivers of value

a. Cost Drivers: Create value by economic savings

1. Example: Machine can process more widgets/hr. with
less electricity and labor costs

b. Revenue Drivers: Add incremental value by facilitating

revenue or margin requirements
1. Example: Packaging is more attractive thus increasing
sales
II. Quantify impact of firms product/service on customer’s
business model
a. Does it make or save money? How much?

III. Compare firm’s product/service to next best alternative

(competitor’s product/service)
a. Isolate unique features that differ from competitor
b. Do those features provide value that customer cannot get
elsewhere?
c. How much value does it create?
 ELASTICITY OF DEMAND

 Consumers buy more or less

Elastic
Elastic
Demand of a product when the
Demand price changes

Inelastic  An increase or decrease in

Inelastic price will not significantly
Demand
Demand affect demand

 An increase in sales exactly

Unitary
Unitary offsets a decrease in prices,
Elasticity
Elasticity and revenue is unchanged
 ELASTICITY OF DEMAND

Price
Price Goes...
Goes... Revenue
Revenue Goes...
Goes... Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity

 Satisfied customers are less price sensitive therefore one
strategy is to make our customers very satisfied so price isn’t
as much of a determinant.

 Switching costs is a consideration depending upon products.

The more sophisticated and unique the product is, and the
more vested interest (costs) in it is, the more apt for the
customer to not switch.
 TARGET PRICING & COSTING
 Many companies base price off of costs

 Problem: Method is internally driven, not market driven

 A better approach is to use Target Pricing

1. It starts by examining and segmenting the market
2. Determine what type, quality and attributes each segment
wants at a pre-determined target price
3. Understand the perception of value to the target selling
price
4. Then calculate costs considering margins
 COST CONCEPT ANALYSIS

 Direct Traceable or Attributable Costs: All costs, fixed or

variable, that are solely incurred for a particular product,
territory, or customer (e.g., raw materials)

 Indirect Traceable Costs: All costs, fixed or variable, that

can be traced to a particular product, customer or territory
(e.g., general plant overhead)

 General Costs: Costs that support a number of activities not

directly related to a particular product (e.g., administrative
overhead, R&D)
 UNDERSTANDING COSTS HELPS
TO UNDERSTAND PRICING

 When adding or deleting a line, successful marketers know exactly

what price points can weaken or break the competition.

 What proportion of cost is raw material or component parts?

 At different levels of product, how does cost vary?

 At what production levels can economies of scale be expected?

 Does our firm enjoy cost advantages over competition?

 How does the “experience effect” impact our cost projections?

 PRICE SKIMMING
Price Skimming is charging a high initial price

Price Skimming:
 Appropriate for distinctly new products
 Provides the firm with opportunity to profitably reach market segments
not sensitive to high initial price
 Enables marketer to capture early profits
 Enables innovator to recover high R&D costs more quickly

Strategy: As the product goes through its product life cycle,

the strategy is to lower the price in line with production and
demand capacity.
 PENETRATION PRICING

Penetration Pricing is charging a very low initial price.

Penetration Pricing is appropriate when there is:

› High price elasticity of demand
› Strong threat of imminent competition
› Opportunity for substantial production cost reduction as
volume expands
 PRICE DISCRIMINATION

The Robinson-Patman Act of 1936:

“…holds that it is unlawful to ‘discriminate’ in price

between different purchasers of commodities of like grade
and quality…where the effect of such discrimination may
be substantially to lessen competition or tend to create a
monopoly, or to injure, destroy or prevent competition..”
 Competitive
price or “low
cost” product
entry

If you
respond, is
Is your
Is there a response competition
No position in No Yes No
Accommodat that would cost less willing and
other Respond
e or Ignore than the preventable able to
markets at
sales lost? reestablish
risk?
the price
difference?
Yes

Does the
value of the Yes
No markets at
risk justify Will the multiple responses
the cost of No required to match a
response? competitions cost less than
the preventable sales loss?
Yes Yes

Respond
Respond

Source: Figure from “How to Manage an Aggressive Competitor” by George E. Cressman, Jr. and
Thomas T. Nagle from BUSINESS HORIZONS 45 (March-April 2002): p. 25. Reprinted with permission from Elsevier.
 TYPES OF BIDDING

 Closed bidding: Suppliers submit a written bid on a

specific contract and all bids are opened simultaneously
and often job goes to lowest bidder…

 On-line sealed bids: on-line auctions

 Open bidding: more informal.

 When it is hard rigidly define requirements
 Prices may be negotiated.
 POLL…
 If price goes up for a commodity/product and the revenue
also goes up at the same time. Then what can you say
about the demand in this situation… choose the correct
option.
A. Elastic demand

B. In-elastic demand

C. Unitary Elasticity

Solution: A

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