Pricing for Results

Approaches in Industrial Markets

Vinod Puri
98206 94960 26314644

Value
Directly related to
Product/Service Quality& Psychic Factors Inversely to Price and Time
Perceived worth of economic financial & technical benefits received in exchange of the price paid for the offering considering competitive offerings

Three Aspects of Customer Value

Psychological: Customer
Intimacy

Functional: Product Leadership Economic: Operational Excellence

broad perspective needed in examining the costs a particular alternative may present for the buyer. Rather than making a decision on the basis of price alone, organizational buyers emphasize the total cost in use of a particular product or service.

Customers Cost-in-Use Components

Value Analysis
What provides value:

Ease in maintenance & handling Fewer parts Convenience Fast / easy operations Greater accuracy Reduced Costs

Process of Value Analysis

Define Value

and Secondary

The Function: Primary

Esteem Analysis equally important to find what does not

provided by Use, Cost &

Cost-Based vs. Value-Based Pricing

Cost-Based Pricing
Price is set by calculating the cost of an offering, then adding a standard percentage profit. 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 Pricing
Price is set based on perceived customer value.

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).

Customers Perception of Value and Evaluated Price

Relevant Costs
must meet the following four criteria

Resultant Costs

Realized Costs

Forwardlooking Incremental Costs

Avoidable Costs

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

Cost Classification System Goals

1.

2.

Properly classify cost data into their fixed and variable components. Properly link them to the activity causing them.

Analysis of Cost Concepts

1.

2. 3.

Direct traceable or attributable costs. Indirect traceable costs. General costs.

Key Components of the Industrial Pricing Process

There

is no easy formula for pricing an industrial product or service. The decision is multidimensional. The each interactive variable assumes significance.

Fig. 15.2

Price Objectives

The pricing decision must be based on objectives congruent with marketing and overall corporate objectives. The marketer starts with principal objectives and adds additional goals:
1.

2. 3.

Achieving a target return on investment, Achieving a market-share goal, Meeting competition.

Sources of the Experience Effect

1.

Learning by doing.

2.

Technological improvements. Economies of scale.

3.

Competitive Bidding

Closed bidding, often used by business and governmental buyers, involves a formal invitation to potential suppliers to submit written, sealed bids for a particular business opportunity. Open bidding is more informal and allows suppliers to make offers (oral and written) up to a certain date.

Several Marketing Objectives Addressed by Pricing

Strategic Purposes

Tactical 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

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

Managing Pricing Tactics

Bundling 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.

Discounts & Allowances

Competitive Bidding
Initiating Price Changes

Sources of the Experience Effect

1.

Learning by doing.

2.

Technological improvements. Economies of scale.

3.

Negotiating Situations in B2B Sales

Situation

Stand-alone Transaction
Effective bargaining styles Effective approach

Balanced between Transaction and Relationship

Problem solving; Compromising Seek common interests

Competitive; Problem solving

Use of leverage

Know your customers needs and their relative importance. Know who has the authority to make a final decision. 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.

Preparation in negotiation is key

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.