B2B MKTG

1. Vitale and Giglierano B2B MKTG 2002 Edition Chapter 10 Pricing in Business-to-Business Marketing Prepared by John T. Drea, Western Illinois University

2. Pricing Basics • Fundamentally, price is an indicator of the worth of a product. • Price needs to be set at a level that indicates that the benefits are worth the price, indicates that the customer can afford the price, the customer cannot obtain more value from some other supplier’s offerings.

3. Exhibit 10-1 Components of the Offering

4. Cost-Based Pricing Price is set by calculating the cost of an offering, then adding a standard percentage profit. Value-Based Pricing Price is set based on perceived customer value. • Cost-Based Price Issues • Costs depend on volume. • Costs assigned by standard rates may have no relationship to actual costs. • Price has no relationship to customers’ perceptions of the offering’s worth. • Value-Based Price Issues • More difficult to implement than cost-based pricing. • Need to establish the evaluated price (the price of the offering from the customer’s perspective after all costs associated with the offering are evaluated). Cost-Based vs. Value-Based Pricing

5. Minimum Price The price that covers the supplier’s relevant costs The highest price a supplier can charge for a product or service Maximum Price • 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 fair price is needed. “Fair” is a function of customer perceptions of the offering value. • Competitor prices and total benefits delivered constitute a reference points in determining what is a fair price.

6. Exhibit 10-3 Customer’s Perception of Value and Evaluated Price

7. Value-Cost Model of Pricing • Need to analyze what activities subtract the most from each customer’s profitability. • At the same time, we need to analyze how important a product is to the customer’s creation of value. • This indicates what each buyer can afford and how sensitive the customer is likely to be to price changes.

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 customer’s customer 1 = Key component, 2 = Significant component, 3 = Minor component Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)

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 customer’s customer 1 = Key component, 2 = Significant component, 3 = Minor component Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)

10. Exhibit 10-5 Maximum and Minimum Price

11. Exhibit 10-6 Effect of Price Reductions on Cost Coverage

12. Exhibit 10-7 Demand and Supply Curves

13. Relevant Costs must meet the following four criteria Resultant Costs Realized Costs Forward- looking Incremental Costs Avoidable Costs

14. Resultant Costs Costs that result from the decision Forward- looking Incremental Costs Costs that will be incurred for the next units of product sold when the decision is implemented Realized Costs Actual costs incurred Avoidable Costs Costs that would not be incurred if the decision were not made to launch the offering. Relevant Costs:On-going revenues must pay for on-going costs

15. Lessons to be learned on the economic fundamentals of price Lesson 1: Demand levels differ at different price levels. Each segment will have a different degree of price sensitivity. Lesson 2: Price changes trigger customer reactions. In the short-term, these reactions may be constrained by customers’ situations. Lesson 3. Price changes trigger reactions from competitors.

16. Strategic 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 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 Several Marketing Objectives Addressed by Pricing

17. Charging relatively low prices to entice as many buyers as possible into the early market. Penetration pricing can assist in obtaining a dominant market share – an excellent defense to future competition. Penetration Pricing 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. Price Skimming Introductory Pricing Strategies

18. Conditions for skimming: • Offering quality and image support the higher price • Small volume production costs allow profits at low sales volume • Sufficient number of adopters at skim price to justify effort Pricing Skimming • Conditions for penetration: • Market must be price sensitive • Production and distribution costs must fall as volume increases (economies of scale) Penetration Pricing Introductory Pricing Strategies

19. Bundling Selling several products and/or services together as one Discounts & Allowances Reductions in price for a special reason (but some customers can get hooked on them!) Sealed bids involve private bids by potential suppliers. In open bids, competitors see each others bids. Competitive Bidding Need to react and change marketing activities as events unfold, such as changes by competitors or customers. Initiating Price Changes Managing Pricing Tactics

20. Determining a Bid Price Expected profit at a given price is calculated as • E(PF) = PW(Pr) x PF(Pr) Where: • E(PF) = Expected profit • PW(Pr) = Probability of winning the bid at price Pr • PF(Pr) = Profit at price Pr

21. Exhibit 10-9 Hypothetical Example of Profit Expectations in a Competitive Bidding Situation

22. Exhibit 10-10 Effect of an Industry Increase in Costs

23. Exhibit 10-11 Two Types of Negotiating Situations in B2B Sales

24. Know your customers’ needs and their relative importance. Know who has the authority to make 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 Know the price range anticipated by the customer. Preparation in negotiation is key

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. Hypercompetition: requires constant collection of information on customer value-cost models and paying attention to your customers’ customers and their perceptions of value. 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.