Ch. 10: Pricing in B2B Marketing

What is Price?

Strategic element of Marketing Mix

Indication of value or worth of something

Without, transactions could not take place

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

The Total Offering

Elements of the Offering:

Product

Service

Image

Availability

Quantity

Evaluated

Price

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.

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).

Value ActivitiesValue

EnablingValueCreating

Exhibit 10-1

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

Customer Perception of Value and Evaluated Price

Offering A

$ EquivalentValue

Total Benefi

ts

Offering B

Total Benefi

ts

EvaluatedPrice

EvaluatedPrice

ValueValue

“A” has more value; customer chooses “A”though “B” has more total benefits

Exhibit 10-4

Attributable cost per unitOffering A

$ EquivalentValue

Competitor’sOffering B

Offering A

Minimum Price per Unit for A

Competitor’sPrice for B

Maximum Price per Unit for A

Customer view –Maximumworth of A

Cost

Acceptable Price Range

Maximum/Minimum PriceExhibit 10-5

Relevant Costs

Meet Following Four Criteria

Resultant Realized

Forward Looking

Incremental

Avoidable

Relevant Costs:

Resultant

Costs that result from the decision

Relevant Costs:

Realized

Actual costs incurred

Relevant Costs:

Forward Looking Incremental

Costs that will be incurred after the next units of product sold when the decision is implemented

Relevant Costs:

Avoidable

Costs that would not be incurred if the decision were not made to launch the offering

Contribution Margin

Difference between ongoing attributable costs and ongoing attributable revenue

Represents portion of revenue that contributes to:o Fixed Costso Indirect Costso Profit

$

Price Cut “A” -- this is still OKPrice Cut “B”

AllocatedCost of Mgr’sSalary— “unavoidable”

AttributableCosts

OriginalPrice

New Price $6500

OriginalProfit Minimum Price –

$6000

Below $6000, you lose more $ with each additional unit sold

Contribution to Cover Mgr’s Salary

$10,000

$7,000

$6,000

Price Cut ExampleHow Low Can You Go?

Supply, Demand, Pricing

Price

Quantity

P1

Q1

Elasticity at P1Q1(Slope of demand curve)

Demand

Supply

Exhibit 10-7

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

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

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

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

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.

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

volumesPenetration Market somewhat elastic Low price acts as barrier Economies of scale are necessary

Managing Pricing Tactics

Bundling Discounts and Allowances Competitive Bidding Initiating Price Changes

Hypothetical Example: Competitive Bidding

Cost Bid Profit Probability

of Winning

Bid

Expected

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

Exhibit 10-10

Determining a Bid Price

Expected Profit at a Given Priceo ØE(PF) = PW(Pr) x PF(Pr)

Where:o ØE(PF) = Expected profito ØPW(Pr) = Probability of winning

the bid at price Pro ØPF(Pr) = Profit at price Pr

Effect of an Industry Increase in Costs

Price

Quantity

P1

Q2

S1S2

P2

Q1

Exhibit 10-11

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 Interest

Exhibit 10-12

Stages of Negotiation Process in B2B Sales

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

Exhibit 10-13

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?

Pricing and the Changing Business Environment

Time Compression

Hyper Competition

Internet