B2B Marketing

Unit 4 (Contd.)

Formulating Business Marketing Strategy

B2B Marketing

Pricing Strategy for Business Markets

Pricing Strategy for Business MarketsPrice is all around 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 MarketsStory……

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 MarketsStory……

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? • How can value be defined and measured?

What Is Customer Value?

It 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.

What Is Customer

Value?The customer value is 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

MarketsThe 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• Sunk investment• Price – quality• Inventory effect

• Unique value effect• Substitute awareness• Difficult 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

Good value Medium value Overcharging

Economy False economy Rip off

Price

Quality

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

changes• Maintain 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 War?• Another non-price option involves seeking help from the central

government. • 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.