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B2B Marketing

Unit 4 (Contd.)

Formulating
Business
Marketing
Strategy
B2B Marketing

Pricing
Strategy for
Business Markets
Pricing Strategy for
Business
Price is all aroundMarkets
us.
We pay rent for our apartment,
tuition for our education, and a fee
to our dentist or physician.
The airline, railways, taxi and bus
charge us a fare; the utilities call
their price a rate; and the bank
charges us interest for the money
we borrow.
We pay a toll when we drive on the
DND and the insurance company
charges us a premium. The
salesman earns commission and the
worker is paid wages.
Pricing Strategy for
Business Markets
Story……
One fine morning Raju went to get his bike
repaired. While his bike was being repaired he
went to a nearby tea stall for his morning tea.
While sipping his hot tea, he observed a cockroach
lying on its back struggling to get up.

Raju also observed a group of ants frantically


searching for food. He saw that the ants were
about to move to a direction away from the
cockroach. He was itching to tell the ants that the
cockroach, the food they were desperately
searching for was near to them.

The role of an innovation champion is much the


same – connect the searching ants to the
cockroach, connect various needs and their
solutions so that synergy is created faster,
cheaper and without failure.
Pricing Strategy for
Business Markets
Story……
To do this, a champion not only needs to be at a
higher vantage point (where he can see both the
ants and the cockroach), but also needs a deeper
understanding of the behaviour of ants – that they
are searching for food, that the cockroach is a
possible food option for the ants.

The champion needs to know the customer’s needs


and connect them to the relevant solutions. In this
example, the ants are Raju's customers. But
suppose Raju's customer is the cockroach? In this
case, Raju has only to indicate to the cockroach
the clear and present danger of ants eating it up,
but also help the cockroach get up on its legs and
move away from the ants.
What Is Customer
Value?
Companies may believe that they know
what value they are delivering but may
not be able to easily define it.
• So what is value?
• How does one know whether value is
being
created in the work?
• Is it being created optimally? At
what cost?
• Does the customer know what is
valuable?
• Is value the same as what the
customer
demands?
What Is Customer
 

It
Value?
is imperative for a company to
understand and empathize with its
customers before defining value –
and remember that there will
always be a trade-off between total
benefit versus total cost.
The customer will continually evaluate
that trade-off. A salesman's role is to
convince the customer that the benefits
the customer perceives are the best that
money can buy. The salesman may not be
able to keep the relationship going if the
value remains a perception only.
Customer
The customer value is
Value?
defined as the perceived
worth of the benefits
received by a customer
in exchange for the total
cost of the offer, taking
into consideration
available competitive
offers and prices.
What Is Customer
Value?
 Fundamentals of Customer Value
What Is Customer
Value?
 Models of Customer Value
Customer Value
Proposition in Business
Markets
The value propositions are classified into
three types:
All benefits: The suppliers list every perceived
benefit delivered by their product or service.
 
Favourable points of difference: Based on the
customer's awareness of alternatives, this
requires the supplier to have knowledge of
alternatives to his own offers.
 
Resonating focus: The suppliers need to make
their offers superior on key elements of value that
are most relevant to the customers. The supplier's
offer must demonstrate and document their
superior performance. In addition, the offer must
clearly display the supplier's understanding of
their customers' business problems.
Pricing is all around us

Price = Cost +
Profit
Price brings in the
Revenues
• This is the only element in the
marketing mix that brings in the
revenues. All the rest are costs.

• Price communicates the value


positioning of the product.
The Pricing
Objective
• Survival
• Maximum current profit
• Maximum market share –
penetration pricing
• Maximum market skimming
• Product quality leadership
What influences
Price Sensitivity?
• Shared cost • Unique value
• Sunk effect
investment • Substitute
awareness
• Price – quality
• Difficult
• Inventory effect comparison
• End benefit
• Total expenditure
What is Price
Elasticity?
• This determines the changes in
demand with unit change in price
• If there is little or no change in
demand, it is said to be price
inelastic.
• If there is significant change in
demand, then it is said to be price
elastic.
Demand is likely to
be less elastic when
• There are few or no substitutes
• Buyers readily do not notice the
higher price
• Buyers are slow to change their
buying habits
• Buyers think that the higher
prices are justified
Price Quality
Strategies
Super value High value Premium
Quality

Good value Medium value Overcharging

Economy False economy Rip off

Price
Estimating Costs
• Fixed costs
• Variable costs
• Learning curve
• Activity based costing
• Target costing
Pricing methods
• Markup pricing
• Target return pricing
• Perceived value pricing
• Value pricing
• Going rate pricing
• Sealed bid pricing
Psychological
Pricing
• It is used to lessen the impact of
the actual pricing in the
consumers’ mind.
• It is used as a surrogate to
indicate the product quality or
esteem.
Discounts and
Allowances
• Early payment
• Off – season
• Bulk purchase
• Retail discount
• Cash discount
• Trade in allowance
Promotional

Pricing
Loss leader pricing
• Special event pricing
• Cash rebate
• Low interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting
Geographical
Pricing
• Different pricing at different
locations
• Could be in terms of barter,
countertrade and foreign
currency
Discriminatory
Pricing
• Customer segment
• Product form
• Image pricing
• Location pricing
• Time pricing
Preconditions
• Market must be segmentable.
• The lower price segment should not be able to
resell the product to the higher price segment.
• The competitors must not be able to undersell
the firm in the higher price segment.
• Should not breed customer resentment and ill-
will.
• Price discrimination should not be illegal.
Product Mix
Pricing
• Product line pricing
• Optional feature pricing
• Captive product pricing
• Two part pricing
• Byproduct pricing
• Product bundling pricing
Initiating Price
cuts
• Excess plant capacity
• Competition
• Aggressive pricing
Initiating price
increases
• When demand exceeds supply
• When costs go up
• Govt. policies
• Reduce/remove discounts and
rebates
Indirect price
increases
• Shrinking pack size for same price
• Substituting less expensive raw
materials
• Reducing product features
• Removing product services
• Using less expensive packaging
material
• Reducing the no. of packs and sizes
offered
• Creating new economy brands
Reaction to price
changes
• Customer reaction
• Competitor reaction
Responding to
competitor price
• Maintain changes
price
• Maintain price and add value
• Reduce price
• Increase price and quality
• Launch a low price fighter
Elements of Customer
Value Framework
Elements of Customer Value
Framework
How Do You Know When
the Price Is Right?
Pricing is managers' biggest marketing headache. It's where
they feel the most pressure to perform and the least certain that
they are doing a good job. The pressure is intensified because,
for the most part, managers believe that they don't have control
over price: It is dictated by the market.
High unit sales and increased market share sound promising but
they may in fact mean that a price is too low. And forgone profits
do not appear on anyone's scorecard.
The first question to ask is not, what should the price be? But
rather, have we addressed all the considerations that will
determine the correct price? Proper pricing comes from carefully
and consistently managing a myriad of issues.
How to fight a
Price War?
In the battle to capture the customer, companies use
increasingly price as the weapon of choice – and
frequently the skirmish degenerates into a price war.
Virtually every competitive move is based on price, and every
countermeasure is a retaliatory price cut. Price wars are
becoming more common because price change is viewed as an
easy, quick and reversible action.

A good idea is to consider other options before


starting a price war or responding to an aggressive
price move with a retaliatory one.
How to fight a Price
War?
The first step is diagnosis. Intelligent analysis that leads to
accurate diagnosis is more than half the cure. The process
emphasises understanding the opportunities for pricing actions based
on current market trends and competitors’ actions and their resources.
Not only is it necessary to understand why a price war is occurring, it
also is critical to recognise where to look for the resources to do battle.

There are several ways to stop a price war before it starts. One
is to make sure your competitors understand the rationale
behind your pricing policies. In other words, reveal your
strategic intentions and capabilities.

Increase product differentiation by adding features to a product,


or build awareness of existing features and their benefits.
Emphasise the performance risks in low-priced options.  
How to fight a Price
• War?
Form strategic partnerships by offering exclusive deals to
suppliers, resellers, or providers of related services.
• Offer bundled prices, two-part pricing, quantity discounts, price
promotions, or loyalty programs for products.
• Introduce new products.
• Introduce flanking brands that compete in customer segments
that are being challenged by competitors.
• Make sure that your competitors know that your costs are low,
is another option that effectively warns them about the
potential consequences of a price war. The common knowledge
about this low cost deters price cutting from competitors.
• Lower costs often tempt a business to cut its prices, but doing
so can diminish consumers' perceptions of quality and may
trigger an unprofitable price war.
How to fight a Price

central government.
War?
Another non-price option involves seeking help from the

• The companies might appeal to customers, vendors,


channel partners, independent sales representatives,
and other like-minded players if the price war could
mean the company's demise.
• Consumers are frequently unaware of substitute
products and their prices, or they may find it difficult to
make comparisons among functionally equivalent
alternatives.
• Some customers are more sensitive to quality than price.
Industrial buyers are often willing to pay more for on-time
delivery or consistent quality because they need those features
to make their business run smoother and more profitably. The
very rational belief that poor quality can endanger one’s health
is an important reason that branded drugs command the prices
they do relative to generic drugs.
How to fight a Price
• War?
Cost structures may be affected by changes in
technology or business practices, which in turn may
tempt a company to cut prices in a manner that will
trigger a price war.
• Many unprofitable price wars happen because a
company sees an opportunity to increase market share
or profits through lower prices, while ignoring the fact
that competitors will respond. Market research may
reveal that sales increases following a price cut justify
the action, but this same research often simply ignores
competitors’ price responses.
• A company’s direct competitors that share the same
technology and speak to the same markets are
important rivals. But indirect competitors that satisfy
customer needs through the use of different
technologies and that have completely different cost
structures are perhaps the most dangerous.
How to fight a Price
• War?
Clearly there are times when it is advisable to engage in a
preemptive strike and start a price war-or respond to a
competitor's discount with a matching or deeper price cut
of your own.
• There are several long-run implications of competing on price.
First, a pattern of price cutting may teach customers to anticipate
lower prices; more patient customers will defer their purchases
until the next price cut. Second, a price-cutting company develops
a reputation for being low-priced, and this reputation may cast
doubt on the quality and image of other products under the
umbrella brand and on the quality of future products.
• If simple retaliatory price cuts are the chosen means of
defense in a price war, then implement them quickly and
unambiguously so competitors know that their sales gains
from a price cut will be short-lived and monetarily
unattractive. A slow response may prompt competitors to
make additional price cuts in the future.
How to fight a Price
• War?
On rare occasions, discretion is the better part of valour.
Consequently, some businesses choose not to fight price
wars; instead, they'll cede some market share rather than
prolong a costly battle. It's in companies' best interests to
reduce price competition because price wars can harm an
entire industry. But diplomatic resolutions of price wars are
generally impossible because overt diplomacy is a form of
price collusion and may attract regulatory oversight. As a
result, price leaders often engage in subtle forms of
diplomacy that use market forces to discipline renegade
companies that threaten industry profits.

• B2B pricing is all about connecting the revenue model to the


customer’s business case and then charging accordingly. Yet
most B2B companies still practice simple cost plus pricing,
thereby leaving substantial profits on the table.