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Understand the special meaning of price Know the factors that influence pricing decisions, i.e. price determinants
INDUSTRIAL PRICING
Suggested Readings Industrial Marketing By Havaldar, Chapter 11 Tata McGraw Hill
business
customers
follow
Value-based
pricing
by
evaluating, suppliers offerings based on the concept of the suppliers offering equal to the difference between the perception of value (or benefits) and the cost to the buying firm. These are value buyers, and marketers should attempt to have value added relationship, if suppliers have purchasing orientations.
elements
like
customers reliable
perceptions warranty
of /
product after-sales
quality
performance, properties.
delivery,
service,
relationships
&
offer
basic
should follow relationship marketing with partnering / collaborative approach and mutually acceptable prices.
Before taking pricing decisions, a buying firm must find "price determinants". (i.e. factors that influence pricing decisions)
(i) Pricing objectives (ii) Customer analysis (iii) Cost analysis (iv) Competitors' analysis (v) Govt. regulation / policies
Pricing strategies
Leasing
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1. Pricing Objectives
Are derived from corporate and marketing objectives. Some of the pricing objectives are survival, maximum
If PED is > 1, demand is elastic, & customers are price sensitive If PED is < 1, demand is inelastic, customers are less sensitive to prices.
and costs.
Benefits are categorized into hard (or tangible) benefits like quality,
production rate, performance, etc. and soft (or intangible) benefits like
customer service, company reputation, warranty period, etc.
Cost includes price, duties and taxes, freight, installation, maintenance.
3. Cost Analysis
A firms total cost of a product is the lowest point on the price range.
Hence, for pricing decisions, the marketer must know the various types of
costs like fixed, variable, total, direct, etc. for a product / service.
Costs vary based on production capacity (i.e. economies of scale), and
Economies of Scale
Accumulated Production
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prices (P1, P2, P3), and its effect on sales revenue and profits.
Sales Revenue at P3
Sales Volume
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4. Analyzing Competition
Many marketers have competitive level Pricing as
a pricing objective.
Marketers
should get Competitors prices, discounts, costs, product quality, service, etc for cost/benefit analysis, pricing and positioning strategy.
various sources.
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PRICING STRATEGIES
Pricing strategies vary as per product-market situations such as (i) Competitive bidding in competitive markets, (ii) New product pricing, (iii) Pricing across product life-cycle.
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sealed bids are invited through newspaper tender notices. Sealed bids are opened in presences of suppliers and orders are placed price bidder(s).
In open bidding, after receiving bids (quotations),
on the lowest
the buyer negotiates technical and commercial parts with suppliers, and then places orders. This
method
is
often
followed
by
commercial
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Equation used : E (A) = P (A) x T(A), where A=Bid price, E(A) = Expected profit at bid price A, P(A) = Probability of winning (or
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Rs.60 corers tender from Dept. of Telecomm. (DOT) for underground cable jointing kits. The company ghosted Rs.400/- per kit (expected maximum profit). Tender opening revealed, it was L4.L1 was Rs. 330/-, L2=350, L3=Rs 380/- The company estimates of B and P(A) were incorrect.
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Skimming Strategy is appropriate for a new product that is distinct, hightech, or capital intensive, and purchased by a market segment that is not sensitive to the initial high price. The advantage is faster recovery of investment by generating larger profits. The disadvantage is that it attracts competitors due to high profits. The firm reduces prices after some time to reach other segments.
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Penetration strategy is appropriate when (i) buyers are highly price sensitive, (ii) strong threat exists from potential competitors (due to low entry barrier). The selling firms objective is to achieve long term profits through
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(iii) Pricing Across Product Life Cycle (PLC) Marketing and pricing strategies vary as the product moves across 4 stages of PLC. (a) Introduction stage: We have discussed pricing strategy in this stage earlier in pricing a new product. (b) Growth stage: The firm lowers the prices to attract the next layer of price sensitive buyers. Also more suppliers
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(c) Maturity stage: The firm may cut the prices to match aggressive competitors prices by giving volume discounts, absorbing freight costs, or more credit. If industrial customers do cost - benefit analysis, a selling firm may increase prices or not make any change in prices due to its superior product quality.
(d) Decline stage: Pricing strategy varies depending on conditions. (i) If buyers perceptions about the firms quality of product / service is good, then the price need not be lowered, but costs should be reduced to earn profits, (ii) if the quality of product / service is equal of lower than competitors, a firm may cut prices, to increase sales volume above break even volume, (iii) if some competitors have withdrawn, a firm may selectively increase prices to less price sensitive segments.
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situations, production capacity utilizations, sales, costs, and profits. It must also understand competitors mind-set, by studying their business philosophy (or concepts), culture, beliefs and past behaviors. Based on above analysis the firm should predict competitors response.
The firm must also understand that customers generally prefer
small price increases several times, rather than one sharp increase. Of course, customers would generally welcome price cuts.
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The responses can be in several ways: (a) maintain price and value (benefits), (b) match competitors price, (c)
develop and launch low-price product item, (d) maintain price. The right
response depends on the business situations faced by the firm.
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PRICING POLICIES
Purpose: A firm evolves pricing policies to adjust basic prices (or price list) for different types of customers (like OEMs, users, and dealers) who buy various quantities and are located at different locations. The price
customers to buy larger quantities, which would reduce the costs of selling, inventory carrying and transportation. The quantity (or volume) discounts are given either on single orders over a period, usually one year (cumulative basis). For example,
or
or or or or
% Quantity Discount
Nil upto 3 upto 6 upto 10
Above discounts are applicable for all types of customers OEMs, users, and dealers / distributors.
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Cash Discounts: The objective is to get prompt payments. If a credit customer pays the bill before dispatch or within 7-days of dispatch, the customer is given cash discount on the gross amount of bill. The extent of cash discount depends on the bank rate of interest. Give cash discounts thru credit notes and the cheques, instead of including it in the bills. Geographical Pricing It includes decisions on how to price the companys products to customers located in different geographic areas. There are two alternatives :
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(i) Ex Factory Pricing: It means prices quoted are based on the prices at the factory gate, i.e. freight ( transportation costs) and transit insurance costs are to the customers accounts. Hence, the landed price (or costs) to
customers get the product almost at the same price, despite different geographic locations. Marketer adds the average freight cost to the basic prices and then prepares the price list, or absorbs the freight cost, if competition demands.
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ROLE OF LEASING
Business buyers have options of either leasing or buying capital items like machinery. The advantages for the lessee (asset user) are : (i) conserving capital, (ii) gaining tax advantages, (iii) getting the latest products. The lessor (asset owner) often earns good income from buying firms who can not afford outright purchase. A lease is a contract (or an agreement) by which the asset owner (lessor) gives the right to use the asset to another party (lessee) in return for payment, over a specified period.
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Operating Leases are service/rental leases, that are cancellable, short-term contracts or agreements, and are not fully amortised. The rates are higher than those of financial leases, because risk of obsolescence are of the lessor
Pricing Strategy It is based on the firms marketing and pricing objectives. Three possible alternatives are : (i) Decide lease rate to favor leasing (ii) Decide lease rate to favor outright purchase (iii) Achieve balance between lease rate & sale rate. Some business marketing firms have representatives for giving financial consultancy services to buying firms on leasing or buying.
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SUMMARY
In business marketing, price has a special meaning. For
that
influence
pricing
decisions
(or
price
are: (a) competitive bidding in competitive markets, (b) new product pricing (c) pricing across product life cycle.
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list) with different types of discounts like volume, trade, and cash, as well as geographical pricing.
for capital items like machinery. Financial and operating are two types of leases. Pricing strategies are made either to favour leasing or outright purchase, or balance between leasing and buying .
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