Ch. 10: Pricing in B2B Marketing

1. Ch. 10: Pricing in B2B Marketing

2. What is Price? • Strategic element of Marketing Mix • Indication of value or worth of something • Without, transactions could not take place

3. Perceived Value and Evaluated Price Value Based vs. Cost Based Pricing • Value Based Pricing - difficult to establish • Cost Based Pricing - easy and often mistakenly used • Costs important in determining profit levels • Beyond this, cost has little to do with price

4. Suppliers creatively combine components of the total offering that contribute to value for specific customers. Components will vary depending on specific customer needs and the customer’s cost structure. Elements of the Offering: Product Service Image Availability Quantity Evaluated Price Value Activities The customer perceives price as a cost in its offering. While some customers will be able to directly fund purchases, others will require financing assistance (GE Credit Corporation finances customer purchases). Other customers may require JIT delivery while others may find value in the brand or image of a particular supplier, particularly if that image can add value to the final product (Intel Inside). ValueEnabling ValueCreating The Total Offering Exhibit 10-1

5. Costs Considered in Evaluated Price:Consumer Perspective • Price paid/value exchanged at purchase • Location convenience • Handling and storage costs for customer • Inventory financing/holding costs • Environmental impact/disposal cost

6. “A” has more value; customer chooses “A”though “B” has more total benefits $ Equivalent Value Total Benefits Total Benefits Evaluated Price Evaluated Price Value Value Offering A Offering B Customer Perception of Value and Evaluated Price Exhibit 10-4

7. Maximum/Minimum Price Exhibit 10-5 $ Equivalent Value Customer view –Maximumworth of A Competitor’sPrice for B Maximum Price per Unit for A Acceptable Price Range Cost Minimum Price per Unit for A Attributable cost per unitOffering A Competitor’sOffering B Offering A

8. Relevant Costs Meet Following Four Criteria

9. Relevant Costs: Resultant • Costs that result from the decision

10. Relevant Costs: Realized • Actual costs incurred

11. Relevant Costs: Forward Looking Incremental • Costs that will be incurred after the next units of product sold when the decision is implemented

12. Relevant Costs: Avoidable • Costs that would not be incurred if the decision were not made to launch the offering

13. Contribution Margin • Difference between ongoing attributable costs and ongoing attributable revenue • Represents portion of revenue that contributes to: • Fixed Costs • Indirect Costs • Profit

14. $ Original Price $10,000 Original Profit New Price $6500 $7,000 Minimum Price – $6000 Below $6000, you lose more $ with each additional unit sold Allocated Cost of Mgr’s Salary— “unavoidable” $6,000 Contribution to Cover Mgr’s Salary Attributable Costs Price Cut “A” -- this is still OK Price Cut “B” Price Cut ExampleHow Low Can You Go?

15. Supply, Demand, Pricing Exhibit 10-7 Demand Supply Price P1 Elasticity at P1Q1 (Slope of demand curve) Q1 Quantity

16. Summary:Economic Fundamentals of Price • Demand levels differ at different levels of Price • Changes in Price yield reaction from customers • Changes in Price yield reaction from competitors

17. Strategic Purposes of Pricing • Achieving Target Level of Profitability • Building Good-Will or Relationships: in a market with certain customers • Penetration of a New Market or Segment • Maximizing Profit for a New Product • Keeping Competitors Out of an Existing Customer Base

18. Tactical Purposes of Pricing • Winning Business of New, Important Customer • Penetrating a New Account • Reducing Inventory Levels • Keeping Business of Disgruntled Customers • Encourage Customer Trial • Encourage Purchase of Complementary Products

19. Pricing Considerations Through: Product Life Cycle and Technology Adoption Life Cycle • Pricing is situational • Customer perceptions of value change • Different market segments attracted at different stages in life cycle • Competitive environment changes • Role of offering in both marketer’s and customer’s organization will change

20. Market Skimming and Market Penetration Pricing Skimming: Charging relatively high prices that take advantage of early adopters’ strong desire for the product. Penetration: Charging relatively low prices to entice as many buyers as possible into the early market.

21. Market Conditions Necessary for Success in:Skimming and Penetration Skimming • Perception must reflect high price • Market is inelastic • Sustainable market advantage • Competitive market entry blocked • Production levels profitable at lower volumes Penetration • Market somewhat elastic • Low price acts as barrier • Economies of scale are necessary

22. Managing Pricing Tactics • Bundling • Discounts and Allowances • Competitive Bidding • Initiating Price Changes

23. Hypothetical Example: Competitive Bidding Exhibit 10-10

24. Determining a Bid Price Expected Profit at a Given Price • ØE(PF) = PW(Pr) x PF(Pr) Where: • ØE(PF) = Expected profit • ØPW(Pr) = Probability of winning the bid at price Pr • ØPF(Pr) = Profit at price Pr

25. Effect of an Industry Increase in Costs Exhibit 10-11 Price S2 S1 P2 P1 Quantity Q2 Q1

26. Negotiating Situations in B2B Sales Exhibit 10-12

27. Stages of Negotiation Process in B2B Sales Exhibit 10-13 • Preparation • Data Collection and Analysis • Determination of Negotiation Strategy • Information Exchange • Elicit Information not yet obtained • Test Hypothesis about nature of situation • Engage in Negotiation • Opening • Discussion positions • Concessions • Closing • Obtain Comitment

28. Final Negotiation Considerations • Who has the authority to make final decisions? • What are the bargaining styles of participants in bargain decision? • Is bargain perceived as transaction, relationship or both? • What evaluated price range is customer expecting?

29. Pricing and the Changing Business Environment • Time Compression • Hyper Competition • Internet