SUSL - Industrial Marketing handout 07

Bachelor of Science ( Special ) Marketing Management

Third Year First Semester

Industrial Marketing : MM3133

Industrial Pricing Strategies

and

Policies

Hand out No: 07

Prepared By:

M.P.D.S.Ananda

10/MS/004

Department of Marketing Management

Faculty of Management Studies

Sabaragamuwa University

12/19/20

1410/MS/004 Ananda MPDS 2

Learning Objectives

1. To explain the special meaning of price in industrial

marketing.

2. To discuss the factors that in influence industrial pricing

decision.

3. To understand about pricing strategies for different product

and decision.

4. To examine the pricing policies for various types of

customers.

5. To analyze the commercial terms and conditions prevailing in

the industrial markets.

6. To explicate the role of leasing in industrial market.

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Special meaning of price

When the industrial buying firm buys a product from XYZ

supplier firm which is in competition with several other

suppliers of the similar product, it means that the buying firm

perceives that XYZ supplier offered the highest delivered value.

The highest delivered value is the difference between the overall

perception of value and the total cost to the buying firm.

The overall perception of value (or the benefits) will vary in

degrees of importance to the different individuals within the

buying committee(or the buying center) of a buying firm.

The total cost to the buying firm includes not only the price of

the product, but also transportation cost, transit insurance cost,

and installation cost.

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Factors that influence pricing decisions

Industrial marketing firms have to consider following factors

in its pricing decision.

1) Pricing objectives

2) Demand analysis

3) Cost analysis

4) Competitive analysis

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1. Pricing Objectives

Pricing objectives should be derived from corporate and

marketing objectives.

This is most important factor in pricing decision.

Some of these objectives:

• Survival

• Maximum short-term profit

• Maximum short-term sales

• Maximum sales growth(or market penetration)

• Maximum market skimming.

• Product quality leadership

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Survival

• Profits are less important than survival. Such companies define their prices in a way that they can cover variable costs and part of fixed costs so that the can survive.

• This is done for a short term and they need to increase the prices because they have to cover total costs to face losses.

Maximum short-term profits

• A firm attempts to maximize its short term profits.

• Companies following this objective select the price that

yields the maximum current profits.

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Maximum short-term sales

• Focuses upon maximizing short-term revenue. Through this,

companies expect to acquire growth and market share.

Maximum Sales Growth (Market Penetration)

• Some companies fix prices of commodities as low as possible with

the objective of maximizing sales volume & market share of it’s

products.

The assumption is that market is price sensitive & that low prices

will increase sales. Other assumptions are,

(1) Highest volume will reduce production & distribution costs,

leading to higher long-term profits.

(2) Low prices will discourage entry of new competitors.

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Maximum market skimming

Some companies fix higher prices in the initial stage of product

life cycle when they introduce new and innovative products.

By this objective, the company skims maximum revenue and

profits.

The assumption: different prices can be charged to different

segments of customers and also at differentiate times.

The risk involved is that high profits resulting from high prices,

will attract entry of competitors.

Product quality leadership

The aim is to produce superior quality products more than rivals.

A firm following this will charge a price which is slightly higher

than the competitors’ prices

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Other Pricing objectives

Between two extremes of market skimming & market

penetration, there is an intermediate range of moderate pricing

alternatives.

Objectives achieved are,

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Be regarded fair by customers

Avoid government intervention

Try to stabilize the market

Meeting the competition

Demand Analysis

If demand hardly changes with a small change in price, then

demand is inelastic. However ,if demand changes to a large

extent with a small change in price, then demand is elastic.

Formula for price elasticity of demand

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Price elasticity of demand = percentage change in quantity demanded

percentage change in price

Cost benefit analysisFor an appropriate pricing strategy an analysis of the

benefits and the cost of the product from the customers point of

view is necessary. benefits can be categorize in to hard and soft

benefits.

1. Hard benefits

The Physical attributes of the product such as production

rate of a machine, rejection rate of a component, price ratio

Ex: price ratio for computers can be rupees per unit of

processing speed

2. Soft benefits

Company reputation, customer service, warranty period,

customer training, and are more difficult to assess.

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3. Cost analysis

• When we make a pricing strategy, costs involved should

be considered.

• Total cost include the sum of fixed costs and variable

costs for a given level of production.

• For making profitable pricing decisions, the industrial

marketer must identify and classify costs.

• They can be shown in the following table.

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Classification of costs

Cost elements Descriptions

Fixed costs

(also known as overheads)

Costs that do not vary with production or

sales. Examples are rent, interest charges, and

managerial salaries. Fixed costs or overheads

are incurred irrespective of production levels

or sales volume.

Variable costs Costs that vary (or fluctuate) in direct

proportion to the levels of production.

Examples are raw materials and direct labor

costs. They are called variable because the

total variable cost varies with the number of

units produced.

Total costs Sum of the fixed and variable costs for any

given level of production is called fixed costs.

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Semi variable costs Costs that vary with changes in output but not

in direct proportion to quantities produced.

Example are equipment repair and maintenance

costs.t his cost have components of fixed and

variable costs.

Direct costs Fixed or variable costs that are incurred

directly for a specific product or sales territory.

Examples are selling expenses, freight and raw

material.

Indirect costs Fixed or variable costs that can be traced

indirectly to sales territory or a product.

Examples are production overhead and quality

control that are indirectly assigned to a product.

Allocated costs /general costs Costs that support a number of activities. these

costs allocated across business groups or

divisions by some arbitrary criterion.

Examples are administrative overhead &

corporate advertising.

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An industrial marketer must understand:

• The costs vary at different levels of production and

economies of scale can be planned.

• Accumulated experience helps in reduction of costs

• The effect of break-even analysis on costs and sales

volume.

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I. Cost behavior at different production levels -

economies of scaleCompanies should know how its costs very with different levels

of production in order to set prices in appropriate way.

Sometimes, some companies may use economies of scale by

building a larger plant size to compete effectively.

200100 300 400

300

200

100

Quantity Produced per Year(in thousand Numbers)

Cost per unit(in RS)

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II. The learning curve• This means, when some cumulative volume of production

increases, certain costs decline.

• This is also called as Experience Curve.

• The major impact of cost reduction takes place in variable costs

although the fixes cost can also be reduces to some extent.

63 9 12

300

200

100

Accumulated Production (in Hundred Thousands of Numbers

Average Cost per unit(in Rs)

' '---------------

------

------

15 180

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III. Break –Even Analysis

It is a financial technique which is used by the marketer to

consider different prices and their possible effects on sales

volumes and profits.

Break even volume= fixed costs

selling price- variable cost

The company should also consider lowering its fixed and variable

costs by using economies of scale and learning curve concept.

Bringing down the costs will further lower the break- even

volumes and improve profits.

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Competitive analysis

• Many industrial marketers regard competitive-level pricing

as the most important pricing strategy.

• Industrial firm should get the information on not only

competitors prices and costs but also about the

competitor’s product information.

• If a firms product quality is superior to all it’s competitors

and its service is equally good, it can price its product

higher than its competitors.

• If the products and services similar to the major

competitor, its price should close to the competitors price.

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Reaction Reason for that reaction

Do not react strongly or quickly to a

price change.

Slowness in noticing the price change.

Confident of their customer loyalty.

React in selective manner React only if price change is large.

React strongly and quickly. They react any attack. Fight to finish

Unpredictable Based on fast behavior, financial

situations, objectives.

Competitors response to price change

A competitor’s response depends on its mind-set.to

understand the

competitor’s mind-set ,an industrial marketers must study the

business philosophy, internal culture, and the past practices

of the competing firm.

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The pricing strategies

• This is the next step after considering the major factors that

influence pricing decisions.

• we will consider the pricing strategies for the following

situations.

I. competitive bidding in competitive market

II. Pricing new products

III. Pricing across the product life cycle

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Competitive bidding.Selling to government undertakings and public sector

companies.

Competitive bidding can be either closed or open.

Strategy for competitive bidding

Commonly used strategy is probabilistic bidding.

It makes two assumptions,

1. The pricing objective is profit maximization.

2. The buying organization will decide the order on the

lowest price bidder.

Three variables are used,

1. Amount or price of the bid

2. Expected profit if the bid price is accepted

3. Decide the order on the lowest price bidder.

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In closed bidding, the government or public sector buyer invites the

potential suppliers through newspaper tender notices to submit written

sealed bids.

In open bidding ,the buyer asks the potential suppliers to submit bids.

this method is generally followed by commercial enterprises in

private sector.

An industrial marketer tries to seek an optimum trade off between

the bid price or profit. It is shown by following equation.

E(A)= O(A)* T(A),

Where,

A= bid price in rupees

E(A)= expected profit at bid prices AP(A)= probability of acceptance of its bid price A is accepted

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Pricing new products

There are two pricing strategies available for a new product which

is in the introductory stage of its life cycle. There are :

1.Skimming (high initial price) strategy

2.Penetration (low initial price) strategy

1.Skimming strategy is used for a distinctly new product which is to

purchased by a market segment that is not sensitive to the initial high

price.

2.penetration strategy is effective when ,price elasticity of demand

is high or buyers are highly price sensitive.

- strong threat exists from potential competitors

- opportunity exists to reduce the unit cost of production and

distribution with increase in volumes.

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Pricing across product life-cycle .

1. Growth stage pricing strategy-

In the growing market, the industrial marketer tends to focus on product

differentiation Product line extension and building new market segment.

Industrial buyers follow the purchasing policy of developing more than

one supplier as more suppliers enter to the market.

Thus innovator firms decide lower price.

2. Maturity stage pricing strategy

In the maturity stage of the product ,the competitors are well-

entrenched and aggressive.to increase sales volume, the marketer has

to cut into the competitors’ market share. to increase sales volume,

the marketer has to cut into the competitors’ market share. This can

be achieved by adopting the pricing strategy of lowering the price to

match the competitors’ prices.

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3. Decline stage pricing strategy

if the company has built a reputation of good product

quality and dependable services, it need not cut the price but

reduce the costs to earn some profits.

another strategy is to cut the price to increase sales

volume above break even volume and use product to help sell

other products in the product mix.

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Pricing policies

Industrial marketers deal with different types of customers

( users, OEMs, dealers) who buy in various quantities and are

located in various geographical locations.to account for these

differences, pricing policies are evolved to adjust the base price,

of a product. industrial marketing firms set a price structure that

covers different product items which describe different sizes and

specifications of a product.

Ex: electric motor is a product with different horse power or

kilowatt ratings ,with different speeds, different enclosures and

different applications.

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Trade discounts

As the name suggests, the trade discounts are offered to the trade, that

is intermediaries ( middlemen) such as dealers and distributors. the

amount of trade discount depends on the particular industry norms or

the functions performed by the intermediaries.

List price( base price)

This is also called as price list. This is a basic price of a

product consisting various sizes or specifications. It is the published

statement of basic prices which is sometimes distributed to the

customers.

Net price is worked out based on list price less discounts or

any other concessions.

Net price= List price- discounts

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Quantity discounts

This is offered to industrial customers who buy large volumes.it is a

price reduction given by subtracting the volume discount from the

list price.

The purpose of quantity discount is to encourage customers to buy

larger quantities and to maintain their loyalty. The decision on the

quantum of quantity depends o demand, costs and competition

analysis.

Cash discount

It is common in industrial market to offer cash discounts to

customers with the objective of getting prompt payments.it is a

discount applicable on the gross amount (ex: basic price plus excise

duty plus sales tax) of the bill, provided the customers pays the bill

with in the stipulated period(of say 7 or 10 days) from the date of

invoice.

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Geographical pricing

This is about how to price the products to customers In different

geographic locations. in geographical pricing, there are generally two

methods of price basis which are stated in the offers or quotation

submitted by a seller to a buyer.

Ex- factory and FOR destination.

i. Ex- factory:

This means that the freight and transit insurance costs are to the

buyer’s account. The seller will charge the costs of freight and insurance

to the buyer. This Is called as the prices prevailing at the factory gate.

ii. FOR Destination or FOB destination

This means the freight costs are absorbed by the seller or

included in the quoted prices.

Taxes and levies

industrial marketer needs the knowledge of tax. Sometimes,

businesses are won or lost due to different levels of central and state sales

taxes.12/19/20


Commercial Terms And Conditions In Industrial

Markets

It is important for sales/ marketing persons to have knowledge and

understanding of commercial matters at the time of preparation of

bids (quotations) and while negotiating with industrial customers.

Terms of payment

- direct payment

- payments through bank

- 95/5 or 98/2 percent payment terms

- bank guarantees

- price basis

- LD/ penalty

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1.Direct payment

Credit is normally offered to a customers who is a good paymaster or

credit –worthy. the good are dispatched directly to the customer and the

bill or invoice is sent to the customer along with other documents such

as invoice- cum excise gate pass (for excisable goods),delivery challah,

inspection(work test) certificate and consignee copy of lorry receipt

(LR) or rail receipt(RR). A seller may allow 10,15,30,45,60,or 90 days’

direct credit to a buyer, depending on the agreement between the seller

and buyer .however ,this is not considered as a secured or safe payment

terms.

2.Payments through bank

There are different types:

- LC (Letter of credit )

- DA (documents on acceptance)

- DP (documents against payment)

Whenever payments are through bank, with LC, DA, or DP terms, the

supplier routes the bill and other documents through the bank.

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4.Bank guarantees

Some industrial customers ,particularly the government undertakings,

ask suppliers to furnish bank guarantees (BG) towards the security

deposit for the fulfillment of the contracts.

3.95/5 or 98/2 percent payment terms

These terms are used by government organizations.

5.Price basis

The prices for industrial products are quoted excluding excise duty,

sales tax or any other government duties.

6.Ld / Penalty

when a buyer mentions in the enquiry that “ the delivery is the

essence of the order/ contract” it means that legally the supplier is

bound to meet the delivery period mentioned in the order/contract.

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Role of leasingA lease is a contract through which the assets owner extends the

right to use the assets to another party in returns for periodic

payment of rent over a specified period.

lease versus purchase

industrial buyers examine the cost/benefit trade-off of

alternatives of buying versus leasing. The benefit of leasing are

conserving capital, gaining tax advantages, and getting the latest

products. The cost of leasing includes the lease payment and

sacrifice of asset’s salvage value.

Types of leases

There are two types of leases:

- Financial (or full- payment) leases

- Operating (or service or rental) leases.

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1.Financial leases

These are non- cancellable, long-term agreements or contracts

and are fully a mortize. The sum of the lease payments over the

contract period equal or exceed the original purchase price of the

capital item. The buyer is generally responsible for operating and

maintenance expenses.

2.Operating Leases

In contrast, these are cancellable ,short term agreements or

contracts, and not fully amortized. Because the asset is provided for a

short period, the purchase option is not included.

Pricing Strategy

Pricing strategy could be decided out of the possible 3 alternatives.

I. Decide lease rate to favor leasing

II. Decide lease rate to favor outright purchase

III. Achieve the balance between lease rate and sales rate12/19/20


Pricing strategies

Depending on the marketing objectives of the firm, the pricing

strategy could be decided out of the possible three alternatives:

- decide lease rate to favor leasing

- Decide the lease rate to favor outright purchase

- Achieve the balance between lease rate and sale rate.

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Thank you

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Education

SUSL - Industrial Marketing handout 07