Pricing Strategy for Business Markets

Dr. Gobinda Roy

International Management Institute Kolkata
17 December 2021
2 Objectives

1. The central elements of the pricing process a value-based

strategy

2. How effective new product prices are established and the need
to periodically adjust the prices of existing products

3. How to respond to a price attack by an aggressive competitor

4. Strategic approaches to competitive bidding

3 1. Customer Value*

 In B2B marketing, customer value is a cornerstone

 The unifying goal of marketers is to be “better than your very best

competitor” in providing value

 “You get what you pay for” is what many provide

 A better approach: “You get more than what you pay for” by
offering lower cost and higher quality
4 1. What is Customer Value?

 How do customer’s view value?

 Everything costs something (sacrifice)

 Everything of value adds something (benefits)

 What’s the difference?

 Benefits – Sacrifice = Value

5 1 Differentiating Through value-creation*

 If relationships are more valuable to customers than price and costs,

then marketers need to emphasize unique add-on benefits around:
1. Building trust
2. Demonstrating commitment
3. Being flexible
4. Initiating joint ventures
5. Working on developing deeper relationships
These efforts enhance customer value & loyalty
6 1 Differentiating Through value-creation

 Research suggests that most companies offer similar services, however, the
following seem to be more prominent.
 Service support
 Personal interactions
 Supplier know-how
 Ability to improve customer’s time to market (UPS tie up with Fort,
improves car delivery time to dealer)
 Moderate differentiating factors include:
 Product quality
 Delivery
 Acquisition and operation costs
7 2. 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
8 Key Components of the
Price-Setting Decision Process
 No easy formula for pricing Set Strategic Pricing Objectives
industrial product or service

 Decision is multidimensional Estimate Demand and the

Price Elasticity of Demand
 Each interactive variable
assumes significance
Determine Costs and
their Relationship to Volume

Examine Competitors’ Prices and Strategies

Set the Price Level

9 2.1 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. (Dow’s pricing low-margin commodity
goods to maintain dominant share VS. DuPont’s higher margin specialty
products)
 Meeting competition.
 Other objectives include competition, channel relationships and product-
line considerations.
 2.1 Price Objectives*
10

Maximum
Survival current profit

Other Maximum
objectives market share

Maximum
Product-quality
market
leadership
skimming
11 2.2 Demand Determinants &
Assessing Value
 There are a number of issues when considering demand:
1. Usage and importance of the product/service by various segments
2. Price Sensitivity (elasticity of demand)
3. Assessing Value: Competitive Value comparisons
 Assume same product by 2 different competitors
 Assume: (“A” charges $24 ; “B” charges $20);

Why might a buyer prefer “A” over “B”?

Could it be that buyer prefers “A” more than “B” because “A’s” total
offering provides more value than “B”.
12 2.2 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
13 2.2 Value Based approach*
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
14 2.2 Value Based approach*

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?
15 2.2 Value Based approach*

IV. Understand how customer uses the product and how much value
will s/he realize

V. Set the price & develop a responsive marketing strategy

BENEFIT: Business marketer can gain a competitive advantage by

employing a value based approach and by developing tools to
document and communicate their unique value to customers.
16 2.2 Other Factors for Demands
 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.
 End Use: How important is the product as in input into the total cost of the
end product?
 If cost is insignificant, then demand is inelastic.
17 2.2 Other Factors for Demands
 End-Market Focus: Since demand for many industrial products is
derived from the demand for the product of which they are a part,
STRONG end user focus is needed.
 Derived Demand: By understanding trends such as up or down
markets, up or down sectors, and knowing that not all segments go
up or down at one time, if one is able to plan for a two-tiered market
focus, which takes advantage of the market variability…
 This strategy increases the chances for success.
18 2.3 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
19 2.3 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)
20 2.3 Cost Classification System Goals**

 Target pricing forces marketers to understand what buyers want

and are willing to pay.

 Target costing forces companies to understand their cost

structure by direct/indirect costs, fixed/variable costs, and their
contribution margins.

 Combining target pricing and target costing says that instead of

using cost-control techniques, a better approach is to compute the
total costs that must not be exceeded, allowing for acceptable
margins.
21 2.3 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?
22 2.3 Competition*

 Competition establishes an upper limit on price.

 Price is only a component of the cost/benefit equation.
 There are many ways to have a differential advantage other
than price: advanced features, technical expertise, timely
delivery and product reliability (zero defects) to name a few.
 Service and support also have a differentiating affect.
23 2.3 Hyper-Competitive Situations

In some industries rivals are fairly stable and the competitive
strategy is “don’t rock the boat.”
Other industries, especially high-tech or high profit industries, the
competitive environment is wrought with short-term and
temporary advantages. These are hypercompetitive environments
with strong rivalries.
The strategy to succeed is to create a temporary advantage and destroy
rival advantages by constantly disrupting market equilibrium with new
products, lower prices, and strategic relationships. (Intel in
microprocessor industry)
24 2.3 Competitive Responses
 In analyzing competitors’ responses to any strategic move, a good
idea is to consider direct competitors and substitute their
actions from a cost perspective.

 For example, one idea is to view competition as Followers vs.

Pioneers. More often, pioneers face higher entry costs than
followers for various reasons.
 2.3 Competitive Responses
25  Followers vs. Pioneers
 By failing to recognize potential cost advantages of late entrants, the business
marketer can dramatically overstate costs differences between earlier and later
entrants. What might be the result of this mistake?
26 2.4 Pricing Strategies**
• Price skimming
Outside-in • Penetration pricing
• Target pricing
pricing

• Mark-up/break-even
Inside-out •
•
Peak load pricing
Marginal cost pricing
pricing • Suggested resale pricing
27 2.4 Pricing Strategies**

 Major Pricing Strategies (new products)

1. Target pricing (Follow the Crowd)

1. Price Skimming

2. Penetration Pricing
28 Price Skimming
Price Skimming is charging a high initial price

Price Skimming:
 Appropriate for distinctly new products. (Satellite Communication:
Connecting Machines from Space by Kepler Communications)
 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.
29 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
30 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..”
31 Price Discrimination
 Price discrimination*- Price discrimination occurs
when a company sells a product or service at two or more prices
that do not reflect a proportional difference in costs.

Customer-
Product-form
segment
pricing
pricing

Time pricing Image pricing

Channel
Location pricing
pricing
32 Perceived Value Pricing **
 Perceived Value Pricing (Caterpillar vs Hitachi)

$90,000 Equivalent to competitor price

$7,000 Super durability

$6,000 Super Reliability

$5,000 Superior service

$2,000 Longer warranty on parts

$110,000 Normal price to cover Caterpillar

superior value
-$10,000 Discount

$100,000 Final price

33 Competitive Bidding**

 Certain groups do bidding

1. Governments
2. Large companies (using preferred suppliers) bid for:
a. Non-standard material
b. Complex designs and difficult manufacturing methods
34 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.
35 Online Open Bid Format

Bidding is costly and time consuming.

A. Simultaneous bids often used.

B. All participants see the bids.

C. Goal: push price down.

D. Can damage supplier-customer relationships

36 Strategies of Competitive Bidding

 Choose bid opportunities with care

 Find contracts that offer the most promise

 Remember that the low bidder may be able to secure much more
business that is profitable over the longer term
 How likely will follow-on business occur???
37 5. Evaluating a Competitive Threat*

 When a PRICE WAR occurs, what should you do?

 Should you:
 Lower your price?
 Ignore it?
 Raise it?

 That is what a competitive threat is all about.

38 5. Evaluating a Competitive Threat

1. Before responding, ask: “Do the benefits justify the costs?”

a. If responding to a price change is less costly than losing a sale,
then do it. (Giving 1Lac discount to keep a customer who gives
10Lacs per year)
b. If competitor threat only affects a small segment, the revenues
lost from ignoring it may be so small that it is not worth it.
c. In other words, “Why lower the price to lose revenue from other
segments too?”
39 5.Evaluating a Competitive Threat

2.If you respond to the threat, is the competitor willing to merely

reduce price again to restore the price difference?
 Matching a price cut is ineffective if the competitor will merely
lower the price again.
 Therefore, try to understand what the competitor is trying to do.
1. Do they want % share of market?
2. Do they just want to clear inventory?
3. Do they just want to recoup some of their investment quickly?
40 Evaluating a Competitive Threat

3. Will the multiple responses that may be required still cost less than the
avoidable sales loss?

 One consideration is the industry. In high-capital and labor-intensive

industries, it is better to cut the prices only to the point of variable
cost levels.
 The objective is to try to capture some contribution margin, if possible.

 Strategy: Build into your products high switching costs.

41
Evaluating a Competitive Threat

4. Is your position in other markets at risk if the competitor increases

their % share of market?

Strategically, does the value of all the markets that are at risk
justify the cost of responding to a price war?

Before responding, make sure you understand all of the

ramifications, i.e., lost markets, gained markets, and even
bankruptcy.
42

Thank you