9_Pricing Strategy for Business Markets modified

8/7/2019 9_Pricing Strategy for Business Markets modified

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Pricing Strategy forBusiness Markets

Dr. Neeraj Pandey

NITIE, Mumbai



Concept of Value

Value = Utility to You/ Price you pay

Example: Niche Market, Feeling of security and friendship(reliability)

Customer value represents a business customer·s overallassessment of the utility of relationship with a supplier basedon benefits received and sacrifices made.



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Customer Value in Business Markets

Customer Value

Benefits Sacrifices

Core Benefits Add-on Benefits Acquisition Costs Processing Costs Usage Costs



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Broad perspective needed in examining the costs that any particularalternative may present for buyer.

Rather than deciding based on price alone, organizational buyers

emphasize the total cost in use of particular product or service.

Customers· Cost-in-Use Components



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Key Components of the Price-Setting Decision Process

No easy formula for pricingindustrial product or service

Decision is multidimensional.

Each interactive variable

assumes significance.

Set Strategic Pricing Objectives

Estimate Demand and the Price Elasticity of Demand

Determine Costs and their Relationship to Volume

Examine Competitors Prices and Strategies

Set the Price Level



The Pricing Process in Business Markets

Four main factors affecting price in Business Markets is:

(1) Pricing Objectives

(2) Demand determinants

(3) Cost Determinants

(4) Competition



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Price Objectives

Pricing decision must be based on marketingand overall corporate objectives.

Marketer starts with principal objectives andadds collateral pricing goals:

± Achieving target return on investment.

± Achieving market-share goal.

± Meeting competition.



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Equation highlights how customers compare relative perceived values of twocompeting offerings.

Premium price differential, or perceived relative value, can be broken down

intocomponents

based oneach important attribute

: ± Value of the attribute to the buyer, and

± Perception of how competing offerings perform on that attribute

Relative Perceived Value of Two Product Offerings



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Price Elasticity of Demand

Percentage change in quantity demanded given aparticular percentage change in price.

Factors that influence price elasticity:

± Ease with which customers can comparealternatives.

± Importance of product in cost structure.

±

Value that product represents to customer.



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Cost Classification System Goals

Proper classification of cost data into fixed and variablecomponents.

Proper attribution of costs to activity creating them.

Cost-plus Pricing

Target Pricing



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Cost Concept Analysis

Direct traceable or attributablecosts

Indirect traceable costs

General costs (Overhead)



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Under certain conditions, followers entering a market may confront lower initialcosts than did the pioneer. By failing to recognize potential cost advantages of lateentrants, the business marketer can dramatically overstate costs differencesbetween earlier and later entrants.

SelectedCostComparison

Issues:FollowersVersus thePioneer



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Pricing New Products

Skimming

±

Appropriate for distinctly new products; provides the firm withopportunity to profitably reach market segments not sensitiveto high initial price.

± Enables marketer to capture early profits.

± Enables innovator to recover high developmental costs more

quickly

Penetration appropriate when:

± H igh price elasticity of demand,

±Strong threat of imminent competition,

± O pportunity for substantial production cost reduction asvolume expands



Responding to Price Attacks by Competitors

Rather than emphasizing the lowest price, most businessmarketers prefer to compete on providing superior value.

Long-term strategic consequences of price wars

Ignore ² Accommodate - Retaliate Strategy

Accommodate : Launching a new low-cost version eg.Cerrus chip by Intel for cost-conscious market segment

Build Switching Cost Barriers



Competitive Bidding

Normal Bidding ( Closed and Open)

Reverse Auctions (fear: commoditization; drive profit

margins down and reduces opportunity to develop mutuallybeneficial relationship)

Choose potential bid opportunities with care

Gaining initial contract at v low price to securelong-term follow-up business



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Competitive Strategy Rules

Never participate in competitive engagement youcannot win.

Always participate in competitive engagementfrom advantageous position. Don·t fight bycompetitors rule



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