Download - Industrial Pricing Strategies & Policies
INDUSTRIAL PRICING STRATEGIES & POLICIES
• Pricing is a critical part of industrial marketing strategy
• An industrial marketing manager should integrate various strategies or the element of marketing mix,
(such as product,price,promotion,&place) so as to ensure that the total offering not only satisfies the market needs but also meets company's objectives
SPECIAL MEANING OF PRICE
• When an industrial buying firm buys a product from XYZ supplier which is in competition with several other suppliers of similar product,it means that buying firm perceives that XYZ supplier offered highest delivered value
• If there is no agreed formula on the importance to be given to various benefits,different individuals in the buying firm will have different perceptions of value provided by various supplier
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• Eg.Production managers may consider quality & reliability of delivery as the most important benefit for raw materials & components supplied for manufacturing operations
• Financial manager may give more importance to lowest cost & liberal payment terms
• Purchase or material managers may consider reputation of the supplier firms
FACTORS INFLUENCING PRICING DECISION
• Pricing objectives• Demand analysis• Cost analysis• Competitive analysis• Government Regulations
PRICING OBJECTIVES
• (1) SURVIVAL-A short-term objective followed by some companies is survival if the factory production capacity is underutilised to a large extent or unsold finished products have piled up, or due to intense competition, a firm is unable to sell its products
• To keep factory going & convert inventory to sales,as a part of survival objective,an firm reduces prices
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• Profits are less important than survival• Prices are set in such a way that they cover
variable costs & a part of fixed costs so that company stays in business
• This is done for a short-term• However,in the long run,the firm must raise
its prices to cover total costs or face losses
(2) MAXIMUM SHORT TERM PROFITS
• Some companies try to set prices with the objective of maximisation of short-term profits
• They look for maximum current profits• They ignore long-term performance &
customer relationships• They look more market were there are no or
less compititors
(3) MAXIMUM SHORT TERM SALES
• Companies set prices with objective of maximising short-term sales revenue
• For doing this,it is required to forcast the company sales over a period of time
• They belive,that by maximising sales revenue the companies will have growth in market share & also have profit maximisation
(4) MAXIMUM SALES GROWTH(MARKET PENETRATION)
• Some companies fix prices of commodites as low as possible with the objective of maximising sales
• 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
(5) MAXIMUM MARKET SKIMMING
• If market penetration price is placed at one end of pricing alternatives,skimming price would be found at the other end
• Some companies set high prices in the initial stages of the product life-cycle when they introduce new & innovative products
• New product is initially aimed at those market segments where demand is least sensitive to price
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• The company gets maximum revenue & profits
• As the time passes & sales slow down,prices are lowered in stages to attract new customers from price-sensitive market segments
• The assumption is different prices can be charged to different segments of customers at different times
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• The risk involved is that high profits, will attract new competitors
(6) PRODUCT QUALITY LEADERSHIP
• A company may have an objective to be product-quality leader in a market
• The company,therefore,produces superior quality product & charges slightly higher than the competitors price
• This pricing objective results in higher profits
(7) OTHER PRICING OBJECTIVES
• Between two extrems of market skimming & market penetration,there is an intermediate range of pricing alternatives
• Objectives achieved are• Be regarded fair by customers• Avoid government intervention• Try to stabilise the market• Handling The competition
DEMAND ANALYSIS• In measuring the price & demand relationship, market researcher should control factors like promotion & customer service
which are important• The basic purpose of demand analysis is to find out to what extent demand for a product changes with changes in prices• It indicates whether buyers are less price sensitive(inelastic demand),or more price sensitive(elastic demand)
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• 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• Price elasticity of demand= % change in
quantity demanded/ % change in price
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• Eg.(1)If price increase by 2% & demand falls By 5%
• Price elasticity of demand=5/2= -2.5 (the minus sign confirms the inverse relationship between price & the demand)
• Demand is said to be elastic,because with small change in price ,there is drastic change in demand
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• Eg.(2)If price reduced by 10 % & demand increase by 5%
• Price elasticity of demand=5/10= -0.5
• Demand is said to be inelastic,because with large change in price ,there is small change in demand
CONDITIONS DETERMINING PRICE ELASTICITY OF DEMAND
• The demand is likely to be less elastic(inelastic) under following conditions
• 1.There are few competitors• 2.No availability of substitute products• 3.Buyers think higher prices are justified by
inflation or changes in government polices on excise duty or sales tax, & others
GOVERNMENT REGULATIONS
• Government have regulations to ensure fair play,& protect consumers & smaller companies
• Price-fixing is illegal as per MONOPOLIES & RESTRICTIVE TRADE PRACTICES(MRTP) act
• Eg.In US several companies & individuals were fined & also some CEOs were sentenced to jail in march 2000.for graphide electrode price-fixing conspiracy
PREDATORY PRICING
• Is no permitted,because it takes place when a company with dominant position lowers its prices,so that new or smaller firms cannot operate in profitable manner
• Eg.Rs.60 cr tender of Department of Telecommunication for supply of jointing kits.offered very low prices