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1
2002 Edition
Vitale and Giglierano
Chapter 10Pricing in Business-to-Business Marketing
Prepared by John T. Drea, Western Illinois University
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Pricing Basics
• Fundamentally, price is an indicator of the worth of a product.– Price needs to be set at a level that
indicates that the benefits are worth the price,
indicates that the customer can afford the price,
the customer cannot obtain more value from some other supplier’s offerings.
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Exhibit 10-1 Components of the Offering
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Cost-Based PricingCost-Based PricingPrice is set by calculating the cost of an offering, then adding a standard percentage profit.
Value-Based PricingValue-Based PricingPrice is set based on perceived customer value.
Cost-Based vs. Value-Based Pricing
Cost-Based Price IssuesCost-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 offering’s worth.
Value-Based Price IssuesValue-Based Price Issues•More difficult to implement than cost-based pricing.•Need to establish the evaluated price (the price of the offering from the customer’s perspective after all costs associated with the offering are evaluated).
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Maximum Maximum PricePrice
Maximum Maximum PricePrice
The highest price a supplier can charge for a product or service
Key Points:If there is no competition, maximum price is the point where benefits just barely exceed the evaluated price.To build a relationship, a fair price is needed. “Fair” is a function of customer perceptions of the offering value.Competitor prices and total benefits delivered constitute a reference points in determining what is a fair price.
Minimum Minimum PricePrice
Minimum Minimum PricePrice
The price that covers the supplier’s relevant costs
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Exhibit 10-3 Customer’s Perception of Value and Evaluated Price
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Value-Cost Model of Pricing
• Need to analyze what activities subtract the most from each customer’s profitability.
• At the same time, we need to analyze how important a product is to the customer’s creation of value.
• This indicates what each buyer can afford and how sensitive the customer is likely to be to price changes.
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Exhibit 10-4a Value-Cost Model for Analyzing Customers
Management and infrastructure…. Value score: FC%Technology development………… Value score: FC%Other overhead……………………. Value score: FC%
Delivery &customer Supplyservice Sales Marketing Operations logistics Materials
Value Value Value Value Value Valuescore: score: score: score: score: score:
VC% VC% VC% VC% VC% VC% FC% FC% FC% FC% FC% FC%
Value score: Contribution to value for customer’s customer1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)
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Exhibit 10-4b Value-Cost Model for Analyzing Customers
Management and infrastructure…. Value score: 1 FC% 15%Technology development………… Value score: 3 FC% 5%Other overhead……………………. Value score: 3 FC% 20%
Delivery &customer Supplyservice Sales Marketing Operations logistics Materials
Value Value Value Value Value Valuescore: 1 score: 3 score: 3 score: 1 score: 2 score: 3
VC% 10% VC% 0% VC% 0% VC% 70% VC% 10% VC% 10%FC% 25% FC% 10% FC% 5% FC% 20% FC% 0% FC% 0%
Value score: Contribution to value for customer’s customer1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)
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Exhibit 10-5 Maximum and Minimum Price
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Exhibit 10-6 Effect of Price Reductions on Cost Coverage
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Exhibit 10-7 Demand and Supply Curves
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Relevant Costs
must meet the following four criteria
ResultantResultantCostsCosts
AvoidableAvoidableCostsCosts
Forward-Forward-looking looking
IncrementalIncrementalCostsCosts
RealizedRealizedCostsCosts
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Relevant Costs:On-going revenues must pay for on-going costs
ResultantResultantCostsCosts
Costs that result from the decision
RealizedRealizedCostsCosts
Actual costs incurred
Forward-Forward-looking looking
IncrementalIncrementalCostsCosts
Costs that will be incurred for the next units of product sold when the decision is implemented
AvoidableAvoidableCostsCosts
Costs that would not be incurred if the decision were not made to launch the offering.
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Lessons to be learned on the economic fundamentals of price
Lesson 1: Demand levels differ at different price levels. Each segment will have a different degree of price sensitivity.Lesson 2: Price changes trigger customer reactions. In the short-term, these reactions may be constrained by customers’ situations.
Lesson 3. Price changes trigger reactions from competitors.
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Several Marketing Objectives Addressed by Pricing
• Strategic PurposesStrategic 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
• Tactical PurposesTactical Purposes– 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
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Introductory Pricing Strategies
PenetrationPenetrationPricingPricing
Charging relatively low prices to entice as many buyers as possible into the early market. Penetration pricing can assist in obtaining a dominant market share – an excellent defense to future competition.
PricePriceSkimmingSkimming
Charging relatively high prices that take advantage of early adopters’ strong desire for the product. Skimming is most effective when an offering has significant patent protection and offers significant value at the skim price.
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Introductory Pricing Strategies
PenetrationPenetrationPricingPricing
Conditions for skimming:•Offering quality and image support the higher price•Small volume production costs allow profits at low sales volume•Sufficient number of adopters at skim price to justify effort
PricePriceSkimmingSkimming
Conditions for penetration:•Market must be price sensitive•Production and distribution costs must fall as volume increases (economies of scale)
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Managing Pricing Tactics
BundlingSelling several products and/or services together as one
Discounts &Allowances
Reductions in price for a special reason (but some customers can get hooked on them!)
CompetitiveBidding
Sealed bids involve private bids by potential suppliers. In open bids, competitors see each others bids.
InitiatingPrice Changes
Need to react and change marketing activities as events unfold, such as changes by competitors or customers.
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Determining a Bid Price
Expected profit at a given price is calculated as
E(PF) = PW(Pr) x PF(Pr)Where:E(PF) = Expected profitPW(Pr) = Probability of winning the bid at
price PrPF(Pr) = Profit at price Pr
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Exhibit 10-9 Hypothetical Example of Profit Expectations in a Competitive Bidding Situation
Cost Bid ProfitProb. of
Winning BidExpected
Profit
$20,000 $20,000 $0 .2 $0
$20,000 $22,000 $2,000 .5 $1,000
$20,000 $24,000 $4,000 .7 $2,800
$20,000 $26,000 $6,000 .5 $3,000
$20,000 $28,000 $8,000 .4 $3,200
$20,000 $30,000 $10,000 .3 $3,000
$20,000 $32,000 $12,000 .2 $2,400
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Exhibit 10-10 Effect of an Industry Increase in Costs
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Exhibit 10-11 Two Types of Negotiating Situations in B2B Sales
Situation
Stand-alone
Transaction
Balanced between Transaction and Relationship
Effective bargaining styles
Competitive; Problem solving
Problem solving; Compromising
Effective approach Use of leverage
Seek common interests
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Preparation Preparation in negotiation in negotiation
is keyis key
Know your customers’ needs and their relative importance.
Know the price range anticipatedby the customer.
Know who has the authority tomake a final decision.
Know the bargaining styles of theindividuals 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
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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:Hypercompetition:
requires constant collection of information on customer value-cost models and paying attention to your customers’ customers and their perceptions of value.
The Internet:The Internet:
Improves communication, increases both buyers and marketers preparation. The Internet also facilitates on-line auctions – this is good for commodities, but can minimize relationships for other products.