industrial pricing h
TRANSCRIPT
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INDUSTRIAL PRICING STRATEGIES
AND
POLICIES
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Understand the special meaning of price
Know the factors that influence pricing decisions, i.e.
price determinants
Understand pricing strategies for different
product/market situations
Examine the pricing policies for various types of
customers
Understand the role of leasing
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INDUSTRIAL PRICING
Suggested Readings
Industrial Marketing
By
Havaldar, Chapter 11
Tata McGraw Hill
3
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SPECIAL MEANING OF PRICE
Some business customers follow Value-based pricing by
evaluating, suppliers offerings based on the concept of the suppliers
offering equal to the difference between the perception of value (or
benefits) and the cost to the buying firm. These are value buyers,
and marketers should attempt to have value added relationship, if
suppliers have purchasingorientations.
Perception of value in value-based pricing is made up of several
elements like customers perceptions of product quality /
performance, reliable delivery, warranty / after-sales service,
reputation of the supplier, etc which are enhanced and augmented
properties.
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Cost to the buying firm includes basic Price, freight, transit
insurance, installation, risks of product failure, delayeddelivery, etc,
Some customers are price buyers, Marketers, should
follow transactional relationships & offer basicproperties.
Some other buyers are loyal buyers, for whom marketers
should follow relationship marketing with partnering /collaborative approach and mutually acceptable prices.
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FRAMEWORK OF PRICING DECISIONS
(i) Pricing objectives
(ii) Customer analysis
(iii) Cost analysis
(iv) Competitors' analysis
(v) Govt. regulation / policies
Before taking pricing
decisions, a buying firm must
find "price determinants".
(i.e. factors that influence
pricing decisions)
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Two types of pricing decisions.
Pricing strategies Pricing policies
Setting a price
(product / marketsituations)
Initiating a
price change
Responding to a competitor's
price change
Discounts
Geographical
pricing
Leasing
Competitive/ Tender Bidding
Across PLC
New Product
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PRICE DETERMINANTS OR FACTORS
INFLUENCING PRICING DECISIONS
(i) Pricing objectives, (ii) customer analysis, (iii) cost
analysis, (iv) competitive analysis, (v) Govt. policies.
1. Pricing Objectives
Are derived from corporate and marketing objectives.
Some of the pricing objectives are survival, maximum
short term profits, maximum short term sales,
maximum sales growth, product quality leadership, etc.
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2. Customer (Demand) analysis
It includes demand analysis & cost - Benefit analysis
(i) Demand analysis. Using experimental research, itmeasures relationship between price and demand (or
sales volume). It sums up how sensitive customers
are to the price changes. The formula is:
If PED is > 1, demand is elastic, & customers are price sensitive
If PED is < 1, demand is inelastic, customers are less sensitive to prices.
=% change in quantity demanded
% Change in price
Price elasticity of demand
(PED)
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(ii) Cost Benefit Analysis
Necessary to know target customers perceptions of benefits (or value)
and costs.
Benefits are categorized into hard (or tangible) benefits like quality,
production rate, performance, etc. and soft (or intangible) benefits like
customer service, company reputation, warranty period, etc.
Cost includes price, duties and taxes, freight, installation, maintenance.
3. Cost Analysis
A firms total cost of a product is the lowest point on the price range.
Hence, for pricing decisions, the marketer must know the various types of
costs like fixed, variable, total, direct, etc. for a product / service.
Costs vary based on production capacity (i.e. economies of scale), and
accumulated experience (i. e. learning curve) as shown.
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Costper
Unit
Quantity Produced per year
Cost
per
Unit
Accumulated Production
Experience /
Learning
Curve.Av. Cost Reduction
= 10-30%
Economies of Scale
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Sales
&Costs
Sales Volume
Sales Revenue at P3
Sales Revenue at P2
Sales Revenue at P1
Total CostFixed Cost
Break - Even Analysis is useful to consider different
prices (P1, P2, P3), and its effect on sales revenue and profits.
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4. Analyzing Competition
Many marketers have competitivelevel Pricing asa pricing objective.
Marketers should get Competitors prices,
discounts, costs, product quality, service, etc forcost/benefit analysis, pricing and positioning
strategy.
Competitors information can be obtained fromvarious sources.
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5.Government Regulation/Policies
Govt. regulations are necessary to ensure fair play
and to protect consumers and small scale suppliers.
Price-fixing / price cartels, price discrimination (e.g.
different discounts to distributors/dealers), and
predatory pricing (e.g. dominant firm aiming to
finish competitors) are not permitted (illegal as per
MRTP act, for example)
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PRICING STRATEGIES
Pricing strategies vary as per product-market
situations such as (i) Competitive bidding in
competitive markets, (ii) New product pricing, (iii)
Pricing across product life-cycle.
(i) Competitive Bidding
In business markets, large volume of purchasing is
done through competitive bidding, using either closed(or sealed) bidding or open (or negotiated) bidding
method.
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In closed bidding, often used by the Govt. buyer,
sealed bids are invited through newspaper tendernotices. Sealed bids are opened in presences of
suppliers and orders are placed on the lowest
price bidder(s).
In open bidding, after receiving bids (quotations),
the buyer negotiates technical and commercial
parts with suppliers, and then places orders. Thismethod is often followed by commercial
enterprises in private sector .
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Strategy / Model Used for Competitive Bidding
One of the often used strategies isProbabilistic Bidding,which
makes two assumptions :
(i) Pricing objective is profit maximizations,
(ii) Lowest price bidder will get the order
Equation used : E (A) = P (A) x T(A), where A=Bid price, E(A) =
Expected profit at bid price A, P(A) = Probability of winning (or
getting order ) at the bid price A, T(A) = profit, if bid price A is
accepted.
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An Application (example) of probabilistic Bidding Strategy
Rs.60 corers tender from Dept. of Telecomm. (DOT) for underground cable jointing
kits. The company ghosted Rs.400/- per kit (expected maximum profit). Tender
opening revealed, it was L4.L1 was Rs. 330/-, L2=350, L3=Rs 380/- The company
estimates of B and P(A) were incorrect.
BidPrice
( Rs) (A)
Total CostPer Unit(Rs) (C)
Competitor's
Last TenderPrice(Rs) (B)
Profit (Rs)=
(A) - (C)T (A)
450
430
410
380
360
340
330
400
350
350
350350
350
350
350
350
360
360
360360
360
360
360
360
0.00
0.15
0.400.50
0.72
0.90
0.95
1.00
100
80
6050
30
10
(10)
(20)
0
12.00
24.00
21.60
09.00
(9.50)
(20.00)
25.00
Probability
For getting orderAt A Price= P (A)
Profit (Rs)=E (A)
Expected
P (A) T (A)X
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(ii) New Product Pricing Strategy
In the introduction stage of a new product, two alternative
pricing strategies are available
(i) Skimming (high initial price) strategy, and
(ii) Penetration (low initial price) strategy.
Skimming Strategy is appropriate for a new product that is
distinct, hightech, or capital intensive, and purchased by a
market segment that is not sensitive to the initial high price. The
advantage is faster recovery of investment by generating larger
profits. The disadvantage is that it attracts competitors due to
high profits. The firm reduces prices after some time to reach
other segments.
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Penetration strategy is appropriate when (i) buyers are
highly price sensitive, (ii) strong threat exists from
potential competitors (due to low entry barrier). The selling
firms objective is to achieve long term profits through
high market share. The firm can also achieve cost
leadershipthru economies of scale and experience curve,
which gives competitive advantage.
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(iii) Pricing Across Product Life Cycle (PLC)
Marketing and pricing strategies vary as the product moves
across 4 stages of PLC.
(a) Introduction stage: We have discussed pricing strategy
in this stage earlier in pricing a new product.
(b) Growth stage: The firm lowers the prices to attract the
next layer of price sensitive buyers. Also more suppliers
enter the market and buying firms put pressure on the
existing suppliers to lower prices.
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(c) Maturity stage: The firm may cut the prices to match
aggressive competitors prices by giving volume discounts,
absorbing freight costs, or more credit. If industrial customers docost - benefit analysis, a selling firm may increase prices or not
make any change in prices due to its superior product quality.
(d) Decline stage: Pricing strategy varies depending onconditions. (i) If buyers perceptions about the firms quality of
product / service is good, then the price need not be lowered, but
costs should be reduced to earn profits, (ii) if the quality of
product / service is equal of lower than competitors, a firm may
cut prices, to increase sales volume above break even volume,
(iii) if some competitors have withdrawn, a firm may selectively
increase prices to less price sensitive segments.
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Initiating price changes
If a firm is a market leader and wants to change the price, it must
anticipate reactions from customers and competitors.
The firm must study major competitors objectives, financial
situations, production capacity utilizations, sales, costs, and
profits. It must also understand competitors mind-set, by
studying their business philosophy (or concepts), culture, beliefs
and past behaviors. Based on above analysis the firm should
predict competitors response.
The firm must also understand that customers generally prefersmall price increases several times, rather than one sharp
increase. Of course, customers would generally welcome price
cuts.
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Responding to competitors price changes
A marketer should respond after answering the following questions:
(i) Why the competitor has changed the price?
(ii) Is the price change temporary or permanent?
(iii) What will happen to the companys sales and profits, if it does not
respond?
(iv) What would be the reactions of other competitors?
The responses can be in several ways:
(a) maintain price and value (benefits), (b) match competitors price, (c)develop and launch low-price product item, (d) maintain price. The right
response depends on the business situations faced by the firm.
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PRICING POLICIES
Purpose: A firm evolves pricing policies to adjust basic prices (or price
list) for different types of customers (like OEMs, users, and dealers) who
buy various quantities and are located at different locations. The price
list is adjusted with different types of discounts and allowances.
Price list is a statement of basic prices of a product, having various
sizes/specifications.
Net price = price list (or list-price) less discount (or allowances).
Business buyers are more interested in net price
Types of discounts : Trade, quantity (or volume), and cash.
Trade discounts: It is offered to traders or intermediaries (dealers /distributors / stockiest ) and it should be equal and sufficient (as per
industry norms or functions performed). e.g. price list (100) trade
discount (15) = net price (85)
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Volume / Quantity discounts: Here, the objective is to encourage
customers to buy larger quantities, which would reduce the costs of
selling, inventory carrying and transportation. The quantity (or
volume) discounts are given either on single orders over a period,
usually one year (cumulative basis). For example,
Above discounts are applicable for all types of customers
OEMs, users, and dealers / distributors.
Size of each
Purchase order
Yearly Total
Purchase
% Quantity
Discount
Less than 5 nos.,
5 - 10 nos.,
11 -15 nos.,
> 15 nos.,
Less than Rs. 5,000
Rs. 5,000 - 10,000
Rs. 10,000 - 15,000
> Rs. 15,000
Nil
upto 3
upto 6
upto 10
or
or
or
or
,
,
,
,
or
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Cash Discounts: The objective is to get prompt
payments. If a credit customer pays the bill beforedispatch or within 7-days of dispatch, the customer is
given cash discount on the gross amount of bill. The
extent of cash discount depends on the bank rate of
interest. Give cash discounts thru credit notes and
the cheques, instead of including it in the bills.
Geographical Pricing
It includes decisions on how to price the companys
products to customers located in different geographic
areas. There are two alternatives :
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(i) Ex Factory Pricing: It means prices quoted are based on
the prices at the factory gate, i.e. freight
( transportation costs) and transit insurance costs are to the
customers accounts. Hence, the landed price (or costs) to
customers vary depending on their geographic locations.
(ii) F.O.R. Destination Pricing: Here, the quoted prices include
freight costs. Transit insurance is a small amount to be covered
by the customers open insurance policy. Hence, all
customers get the product almost at the same price, despite
different geographic locations. Marketer adds the average
freight cost to the basic prices and then prepares the price
list, or absorbs the freight cost, if competition demands.
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Taxes and Duties: Knowledge of excise duty, sales
tax, octroi, entry tax, road permits etc is
essential for sales and marketing persons, since
they have an impact on the landed price (or costs)
to business buyers.
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ROLE OF LEASING
Business buyers have options of either leasing or
buying capital items like machinery. The advantages
for the lessee (asset user) are : (i) conserving capital,
(ii) gaining tax advantages, (iii) getting the latest
products. The lessor (asset owner) often earns good
income from buying firms who can not afford outright
purchase.
A lease is a contract (or an agreement) by which the
asset owner (lessor) gives the right to use the asset to
another party (lessee) in return for payment, over a
specified period.
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Types of Leases:
(i) Financial (or full payment) leases, and
(ii) operating (service or rental) leases
Financial leases: These are full payment, non -
cancellable, long - term contracts and fully
amortised (sum of lease payments purchase
price of capital item)
>
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Operating Leases are service/rental leases, that are cancellable,
short-term contracts or agreements, and are not fully amortised.
The rates are higher than those of financial leases, because risk
of obsolescence are of the lessor
Pricing Strategy
It is based on the firms marketing and pricing objectives. Threepossible alternatives are :
(i) Decide lease rate to favor leasing
(ii) Decide lease rate to favor outright purchase
(iii) Achieve balance between lease rate & sale rate. Somebusiness marketing firms have representatives for giving
financial consultancy services to buying firms on leasing or
buying.
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SUMMARY
In business marketing, price has a special meaning. Forvalue buyers, value based pricing is appropriate.
Factors that influence pricing decisions (or price
determinants) are: (i) pricing objectives, (ii) customeranalysis, (iii) competition analysis, (iv) cost analysis (v)
government regulations/policies
Pricing strategies for different product-market situations
are: (a) competitive bidding in competitive markets, (b) new
product pricing (c) pricing across product life cycle.
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Initiating price changes and responding to competitors
price changes are also parts of pricing strategies.
Pricing policies include adjustment of basic prices (or price
list) with different types of discounts like volume, trade, and
cash, as well as geographical pricing.
Leasing or buying options are available to business buyers
for capital items like machinery. Financial and operating are
two types of leases. Pricing strategies are made either to
favour leasing or outright purchase, or balance between
leasing and buying .