Business marketing -module_5

Pricing Strategies in

Business Marketing

Price is the overall perception of value or the benefits that

will vary in degrees of importance to the different

individuals within the buying committee (buying

Centre) of the buying firm.

However there is no agreed formula on the importance to

be given to various benefits(or attributes), different

individuals in the buying centre will have different

perception.

What is Meaning of the Price?

A business marketing firm has to consider many

factors in its pricing decisions and they are:

1) Pricing objectives

2) Demand analysis

3) Cost analysis

4) Competitive analysis

5) Government regulations

Factors influencing Pricing decision

It is derived from the corporate and marketing

objectives.

1. Survival

2. Maximum short term profits

3. Maximum short term sales

4. Maximum marketing skimming

5. Product-quality leadership

6. Other pricing objectives

Pricing Objectives

Conditions determining price elasticity of demand:

the demand is likely to be less elastic ( or inelastic)

under the following conditions.

• There are few competitors

• No availability of substitutes

• The high prices

Demand Analysis

Categorized in two benefits and they are:

1. Hard benefits, refers to physical attribute of the

product such as production rate of a

machine, rejection of a component, and

price/performance ratio.

2. Soft benefits includes company reputation, customer

service, warranty period, customer training and

more difficult to assess.

Cost-Benefit Analysis

Company costs set the lowest point on the price

range. Hence forth pricing strategy or decisions

must consider the cost involved. The industrial

marketer must identify and classify costs.

And they are classified as Fixed costs, Variable

costs, Total Costs, Semi variable costs, Direct

costs, Indirect Costs and allocated costs

The industrial marketer must understand and they

are…..

Cost Analysis

• Production costs

• Accumulated experience helps in reduction

of costs

• The effect of break-even analysis on costs

& sales volume

Cost Analysis

Fixed, Variable, Semi Variable, Indirect and Direct

costs

Production Costs

TFC

AFC

Production

C

o

s

t

s

Total Fixed Costs & Average Fixed Costs

Total Variable Cost

TC

FC

TVC

TFC

Total Cost

Sl

Number

Cost Elements

1 Executive salary

2 Marketing Persons salary

3 Tax & Insurance

4 Depreciation

5 Interest on Capital

Total Total Fixed cost per unit

Prof. Raghavendran.V

Production Costs

FIXED

COSTS

Sl

Number

Cost Elements

1 Direct Labour

2 Direct Materials

3 Factory Supplies

4 Inventory carrying

Total Total Variable cost per unit

Average Average cost per unit

VARIABLE

COSTS

Is also called as learning curve or Experience Curve.

This concept costs ( particularly variable costs) decline

as cumulative volume of production increases. In

other words, the average unit total cost of a product

declines over a period with accumulated experience of

production and sales.

Accumulated Experience

Accumulated Production

Avg

Cost

Per Unit

It is technique which is used by the marketer to

consider different prices and their possible effects

on sales volumes and profits.

Break Even Analysis

Sales Revenue @ 30 @ 25

@ 20

Total

Cost

FIXED COST

Competitive-level pricing as most important

pricing strategy. An industrial Firm should

get the information on not only

competitor’s level prices and costs but also

competitors product quality, technical

expertise and delivery performance.

Competitor Analysis

BM should be aware of the effect of government

regulations on pricing decisions. Though we free

market economy, there are some necessary

restrictions that must be placed on business to

ensure fair play and to protect consumers and

smaller companies.

• Price discrimination

• Predatory Pricing

Government Regulations:

There are different methods or approaches to

determine the price of the product. BM should be

aware of those to implement it and they are as

follows:

Cost Based Pricing

Value Based Pricing

Customer Determined Pricing

Competition Based Pricing

Pricing Methods

1. Competitive Bidding & negotiation

2. Pricing New products

3. Pricing across the product-life cycle

Competitive Bidding & negotiation:

Strategy for competitive bidding, this is known as

probabilistic bidding, this strategy make 2

assumptions and the pricing objective is profit

maximization and buying organization will decide the

order on the lowest bidder.

Pricing Strategies

Three variables are used in this technique:

Amount or price of the bid

Expected profit, if the bid price is accepted and

The probability of acceptance of this bid price.

E(A)= P(A) * T(A)

A= bid in Rs

E(A)=Expected profit at bid price A

P(A)=Probability of acceptance of the bid price A

T(A)= Profit, if the bid price A is accepted

Pricing New Products:•Skimming (High Initial Price)

•Low Penetration ( Low Initial Price)

Pricing Across Product Life-Cycle

•Growth stage Pricing Strategy

•Maturity Stage

•Decline Stage

Key Terms Associated with pricing

Discounts

List Price

Trade Discounts

Quantity Discounts

Cash Discounts

Geographical pricing

Ex-factory

FOR & FOB destination

Taxes and Levies

Pricing Policies

It is an alternative to selling capital goods is a commonthing in business marketing. Basically it isarrangement between the leasing company (lessor)and the user (lessee)

The lessee has to pay in form of rentals and lessorremains the owner of the equipment during thespecified period.

There are 4 types of leases viz,

Operating Lease

Financial Lease

Sale and lease back transaction

Leveraged lease

Leasing

Cost Behavior at Different Production Levels –

Economies of Scale

0 100 200 300

200

100

300

240

Quantity Produced / Year (in thousand)

Cost

/ U

nit

(in

ru

pees)

The Pricing Strategies

Competitive bidding in competitive markets

Probabilistic bidding

Pricing new products

Skimming strategy

Penetration strategy

Pricing across the product life-cycle

Growth stage pricing

Maturity stage pricing

Decline stage pricing