value based pri
TRANSCRIPT
-
8/3/2019 Value Based Pri
1/25
1
Chapter 10Pricing in Business-to-Business Marketing
Prepared by John T. Drea, Western Illinois University
-
8/3/2019 Value Based Pri
2/25
2
Pricing Basics
Fundamentally, price is an indicator of
the worth of a product.
Price needs to be set at a level thatindicates that the benefits are worth the price,
indicates that the customer can afford the price,
the customer cannot obtain more value
from some other suppliers offerings.
-
8/3/2019 Value Based Pri
3/25
3
Exhibit 10-1 Components of the Offering
Elementsofthe offering:
ProductServiceImage
Availability
QuantityEvaluatedprice
Supplierscreativelycombinecomponents
of the total offering thatcontributeto value for
specificcustomers.Componentsvary
dependingon specificcustomerneedsandthe customers cost
structure.
The customerperceivesprice as a cost in its offering.While somecustomersare
able to directly fundpurchases,othersrequire
financingassistance(GECredit Corporation
financescustomerpurchases).
Other customersmay requireJIT delivery while others
may find value in the brandor image of a particular
supplier, particularlyif thatimage can add value to thefinal product (Intel Inside).
Added value
Support activities
Direct activities
-
8/3/2019 Value Based Pri
4/25
4
CostCost--Based PricingBased Pricing
Price is set by calculatingthe cost of an offering,
then adding a standard
percentage profit.
ValueValue--Based PricingBased Pricing
Price is set based onperceived customer value.
Cost-Based vs. Value-Based Pricing
CostCost--Based Price IssuesBased Price IssuesCosts depend on volume.
Costs assigned by
standard rates may have
no relationship to actual
costs.Price has no relationship
to customers perceptions
of the offerings worth.
ValueValue--Based Price IssuesBased Price IssuesMore difficult to implement
than cost-based pricing.
Need to establish the
evaluated price (the price ofthe offering from thecustomers perspective
after all costs associated
with the offering are
evaluated).
-
8/3/2019 Value Based Pri
5/25
5
MaximumMaximum
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 fairprice is needed. Fair is afunction of customer perceptions of the offering value.
Competitor prices and total benefits delivered constitute
a reference points in determining what is a fair price.
MinimumMinimum
PricePrice
The price that covers the
suppliers relevant costs
-
8/3/2019 Value Based Pri
6/25
6
Exhibit 10-3 Customers Perception of
Value andE
valuated Price$Equivalent
value
A has more value; customer choosesAthough B has more total benefits.
ValueValue
Evaluatedprice
Evaluatedprice
Total
benefits
Offering A Offering B
Totalbenefits
-
8/3/2019 Value Based Pri
7/25
7
Value-Cost Model of Pricing
Need to analyze what activities subtract the
most from each customers profitability.
At the same time, we need to analyze howimportant a product is to the customers
creation ofvalue.
This indicates what each buyer can afford
and how sensitive the customer is likely to be
to price changes.
-
8/3/2019 Value Based Pri
8/25
8
Exhibit 10-4a Value-Cost Model for Analyzing Customers
Management and infrastructure. Value score: FC%
Technology development Value score: FC%Other overhead. Value score: FC%
Delivery &
customer Supply
service Sales Marketing Operations logistics Materials
Value Value Value Value Value Value
score: score: score: score: score: score:
VC% VC% VC% VC% VC% VC%
FC% FC% FC% FC% FC% FC%
Value score: Contribution to value for customers customer
1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)
-
8/3/2019 Value Based Pri
9/25
9
Exhibit 10-4b Value-Cost Model for Analyzing Customers
Management and infrastructure. Value score: 1 FC% 15%
Technology development Value score: 3 FC% 5%Other overhead. Value score: 3 FC% 20%
Delivery &
customer Supply
service Sales Marketing Operations logistics Materials
Value Value Value Value Value Value
score: 1 score: 3 score: 3 score: 1 score: 2 score: 3
VC% 10% VC% 0% VC% 0% VC% 70% VC% 10% VC% 10%
FC% 25% FC% 10% FC% 5% FC% 20% FC% 0% FC% 0%
Value score: Contribution to value for customers customer
1 = Key component, 2 = Significant component, 3 = Minor component
Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)
-
8/3/2019 Value Based Pri
10/25
10
Exhibit 10-5 Maximum and Minimum Price$
Equivalentvalue Customer view
Maximum
worth of A
Maximumprice per
unit for A
Minimum
price perunit for A
Attributablecost per unit
offering A
CostAcceptableprice range
Competitorsoffering B
Competitorsprice for B
Of fering A
-
8/3/2019 Value Based Pri
11/25
11
Exhibit 10-6 Effect of Price Reductions on
Cost Coverage$
Attributable
costs
Allocated cost
of managers
salary
Original price
Original profit New price A
Loss
New price B
Contribution
to cover
managers
salary
Price cut A Price cut B
-
8/3/2019 Value Based Pri
12/25
12
Exhibit 10-7 Demand and Supply Curves
QuantityQ
Elasticityat PQ
(slope of demand curve)
Price
P
Demand Supply
-
8/3/2019 Value Based Pri
13/25
13
Relevant Costs
must meet the following four criteria
ResultantResultant
CostsCosts
AvoidableAvoidable
CostsCosts
ForwardForward--
lookinglooking
IncrementalIncremental
CostsCosts
RealizedRealized
CostsCosts
-
8/3/2019 Value Based Pri
14/25
14
Relevant Costs:On-going revenues must pay for on-going costs
ResultantResultant
CostsCostsCosts that result from the decision
RealizedRealized
CostsCosts Actual costs incurred
ForwardForward--
lookinglookingIncrementalIncremental
CostsCosts
Costs that will be incurred for the
next units of product sold whenthe decision is implemented
AvoidableAvoidable
CostsCostsCosts that would not be incurred
if the decision were not made to
launch the offering.
-
8/3/2019 Value Based Pri
15/25
-
8/3/2019 Value Based Pri
16/25
16
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
-
8/3/2019 Value Based Pri
17/25
17
Introductory Pricing Strategies
PenetrationPenetrationPricingPricing
Charging relatively lowprices to enticeas many buyers as possible into the
early market. Penetration pricing can
assist in obtaining a dominant market
share an excellent defense to futurecompetition.
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.
-
8/3/2019 Value Based Pri
18/25
18
Introductory Pricing Strategies
PenetrationPenetrationPricingPricing
Conditions for skimming:Offering quality and image support the
higher price
Small volume production costs allow
profits at low sales volumeSufficient 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 ofscale)
-
8/3/2019 Value Based Pri
19/25
19
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 onthem!)
Competitive
Bidding
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.
-
8/3/2019 Value Based Pri
20/25
20
Determining a Bid Price
Expected profit at a given price is calculated as
E(PF) = PW(Pr) xPF(Pr)
Where:
E(PF) = Expected profit
PW(Pr) = Probability of winning the bid at
price PrPF(Pr) = Profit at price Pr
-
8/3/2019 Value Based Pri
21/25
21
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
-
8/3/2019 Value Based Pri
22/25
22
Exhibit 10-10 Effect of an Industry Increase in Costs
QuantityQ2 Q1
PriceP2
P1
S2 S1
-
8/3/2019 Value Based Pri
23/25
23
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 leverageSeek common
interests
-
8/3/2019 Value Based Pri
24/25
24
PreparationPreparation
in negotiationin negotiation
is keyis key
Know your customers needs
and their relative importance.
Know the price range anticipated
by the customer.
Know who has the authority tomake a final decision.
Know the bargaining styles of the
individuals 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
-
8/3/2019 Value Based Pri
25/25
25
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.
H
ypercompetition:H
ypercompetition:
requires constant collection
of information on customer
value-cost models and
paying attention to yourcustomers 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.