Pricing

Price

Marketer Buyer
Revenue-Maximize Cost- minimize

pricing strategy – try to balance and get a strategic fit

to decide on this, elementalize and analyze
the factors that influence
 factors
1. CUSTOMER Because it is derived, business buyer is more concerned with
DEMEND “WHOM TO BUY FROM AND WHY instead of WHETHER OR
NOT TO BUY
Looks at total cost of ownership
Evaluated pricing
Price sensitivity
2.NATURE OF Demand is derived
DERIVED DEMAND What happens if supplier reduces price in an attempt to
increase the share of business?
3.COMPETITION Competitive level of pricing is generally OK
Marketer can have latitude in pricing if the Product is
differentiated by functional design, dependable service
Price leadership- Oligopolistic price
Increase-Shake out and align
Decrease- business will not increase
 factors
4. COST / PROFIT Competition – upper limits on price
RELATIONSHIP
Cost- lower limit
It makes sense to look at the costs but not
just cost alone
Fixed cost-
Variable- linked to output
Semi variable- Repair & maintenance
Allocated costs- Over heads
Sunk costs- resources already acquitted and
you cold do nothing about it now.
 Cost analysis -continued
•Learning curve-BCG 1972
•Started in 1950 when Boeing realized that # hours
on assembly reduced by 20% each time production
doubled
•It was not just labor hours
•It included volume related issues like defective parts,
machine downtime, procurement cost ( moving to
straight re-buy)
•Distribution costs
•Managerial decision making
•Designing
•Reduction is variable or volume related costs
•It is volume dependent and not time dependent
•Learning curve is often used with penetration pricing
•Learning curve should not be used as a strategic tool
 Pricing across PLC

Introduction Growth Maturity Decline

1Skim Non price Differentiation If you remain,
2Penetrate competition Is minimal you will make
PRICE WARS some money
laggards
Time
 Pricing policies
Trade Discounts
Given to the middleman
Generally increased numbers

Quantity discounts
Individual order
Cumulative on an year

Cash discounts
2/10 net 30
Two percent less if paid within 10 days what is
supposed to be paid in 30 days

Geographic pricing
More Relevant internationally
 Selected Trade Terms
EXW FCA FCA FAS F.O.B.
(Named Inland (Named Inland (Named Port Vessel
Carrier at Carrier at of Shipment) (Named Port
Named Inland Named Inland of Shipment)
Point of Port of
Departure Exportation

Origin Inland Carrier Dock at Port Vessel

(Factory, Mine, of Shipment
Plantation,
Warehouse)
India
 Selected Trade Terms
CFR CIF FAS DDU / DDP
(Named (Named Port (Named Place
Port of of Shipment) of Destination)
Destination

Vessel Dock at Port Inland Carrier Destination

of Destination

Country of Destination
 Strategic role leasing
1. Study the tax laws in the location where you are
marketing
2. Account as expense
3. It utilizes pre tax rupees
4. If it is a sale it uses post tax rupees
5. Minimizes equipment disposal problems
6. Control through debt servicing- debt servicing
7. Ideal for capital goods
8. This has opened an avenue for those who were at cross
roads
9. Leasing arrangements
1. Direct to customers
2. Lease to FI
 Price
Determinants
Customer

Costs Competitors
 Price
• Industrial Buyer – Pragmatic and Fact
oriented
• Industrial decisions are not
completely emotionless always nor
consumer decisions are totally
irrational
• Industrial Products have direct impact
on seller and buyer
• Price - carefully interrelate to:

• Product,
• Distribution,
Total offer responsive Yet should generate
• Communication
To market needs strategies
Profits
Price- A Crucial element in product strate
• Distinction – Price for seller is Cost to
the buyer

Supplier Price Keeps in mind

Profitability
&Margin

Evaluates cost w.r.t

Quality
Cost Buyer
Delivery & Service
Price- A Crucial element in product strate
• Distinction – Price for seller is Cost to
the buyer
1.Amount of Buyers
Capital Investment
Price
2.High Price may Offset
savings on using the product

3Low price may lead to higher

Operating costs, shortened PL

Reflection of
Product efficiency Cost
 Factors that Influence Pricing Strateg
• Customer Demand

• Resultant of derived demand

• Whom to Buy from & Why? rather
than whether or not to Buy – assume
-not considering make or buy
• What happens – single product and
multiple application- differs from
segment to segment

• Analyzing Customer benefits

1. Functional benefits (design &

functions)
2. Operational benefits (reliable &
 Factors that Influence Pricing Strateg
• Analyzing Customer Costs
• Life cycle costing analysis
• Maintenance
• Repair and maintenance
• Operating costs

• Price Sensitivity
• Design Engineers- performance
variables
• Production engineer- reliable,
delivery
• Purchase - price
 Factors that Influence Pricing Strateg
• Nature of Derived Demand
• Price Vs Quantity – elastic or
inelastic is difficult to predict here
• Chances of reversal effects are
high
• Decrease the price and you think
that demand will increase?
• Price reduction is not a factor for
procurement because he decides
From whom to buy and not from
whether to buy
• Reduction, not forced by
competitive forces may result in Is
the quality a suspect?
• This is reversal effect
 Factors that Influence Pricing Strateg
• Competition
• Competitive level pricing – most
important
• Anticipated reaction of
Competitors
• Price reduction
• If products are undifferentiated,
then competitors will reduce the
price
• Or differentiate their offer
• Price leadership
• Price Increase
• Competitors won’t
• Loss of market share
• Leader can’t be dominant generally
 Factors that Influence Pricing Strateg
• Costs

• Fixed cost – Rigid cost

• Variable cost -flexible cost

• Semi variable cost

• Costs that fluctuate with changes in
output but not in direct proportion to
quantities produced ( R & M)

• Direct Cost

• Indirect Cost
Allocated cost

• Sunk Costs
Factors that Influence Pricing Strateg
Marginal cost & Contribution analysis
 Factors that Influence Pricing Strateg
• Cost Behavior over time:

• Boeing Recognized this in 1950

• # hours required to build aircraft
reduced by 20% each time cumulative
production doubled

• GM / GE / IBM / TI – noticed and agreed

• They added, it is not only labor hours
but volume related cost factors reduced
like Scrap / defective parts / machine
downtime etc

• BCG developed this concept in 1972

• What is this ?
 Factors that Influence Pricing Strateg
• Cost Behavior over time: Learning
Curve

• Important Distinctions

• LC is volume dependent and not

time dependent

• Cost savings is not limited to

production processes alone.
Managerial decision making,
product and process design,
distribution system, marketing
programs will also indicate savings
 Factors that Influence Pricing Strateg
Cost Behavior over time

10000

20000
Cost

40000

100 1000
Prod rate
 Distinction
• Learning curve

SRAC LRAC LC
Decrease and Decrease and Decrease
then then
Increase Increase
FC- Spread Diseconomies How to do
Worker Too many better
waiting. worker Develop skill
Machine down Lack of control organize
time
Factors that Influence Pricing Strateg

Thumb rule :15% down

for double
tso C

Increased Qty
Factors that Influence Pricing Strateg

SRAC

Join the points to

get LRAC
tso C

Production rate
 Advantages of LC
• Theoretically price will speed up
market growth as well as discourage
some potential competitors

• He has been doing this for years –

we should be careful
• Higher profit – Price war
• Prisoners dilemma is over
 Pricing Strategies
• New Product Introduction

• Market skimming
• Market penetration
• Cost plus
• PLC linked
• Flexible pricing strategy
• Leadership strategies
• New product at whose behest-
very much pertinent
 Pricing Policies
• Discount pricing

• Trade discounts - functional

• Quantity discounts 10 upto 100, 9
beyond
• Cash discounts 2 on 10 net 30
Geographical Pricing
FOB origin
Uniform delivered
Zone Pricing
Basing Point
Pricing for profits?
 Pricing Policies
• Discount pricing

• Trade discounts - functional

• Quantity discounts 10 upto 100, 9
beyond
• Cash discounts 2 on 10 net 30
Geographical Pricing
FOB origin
Uniform delivered
Zone Pricing
Basing Point
Pricing for profits?