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Vitale and Giglierano. B2B MKTG. 2002 Edition. Chapter 10 Pricing in Business-to-Business Marketing. Prepared by John T. Drea, Western Illinois University. Pricing Basics. Fundamentally, price is an indicator of the worth of a product. Price needs to be set at a level that.

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slide1

Vitale and Giglierano

B2B MKTG

2002 Edition

Chapter 10

Pricing in Business-to-Business Marketing

Prepared by John T. Drea, Western Illinois University

pricing basics
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.

cost based vs value based pricing

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
maximum price

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.
value cost model of pricing
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.
exhibit 10 4a value cost model for analyzing customers
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)

exhibit 10 4b value cost model for analyzing customers
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)

relevant costs
Relevant Costs

must meet the following four criteria

Resultant

Costs

Realized

Costs

Forward-

looking

Incremental

Costs

Avoidable

Costs

relevant costs on going revenues must pay for on going costs

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
lessons to be learned on the economic fundamentals of price
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.

several marketing objectives addressed by pricing
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
introductory pricing strategies

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
introductory pricing strategies1

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
managing pricing tactics

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
determining a bid price
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
preparation in negotiation is key

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
pricing and the changing business environment
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.