Value Based Pri

8/3/2019 Value Based Pri

1/25

1

Chapter 10Pricing in Business-to-Business Marketing

Prepared by John T. Drea, Western Illinois University


2/25

2

Pricing Basics

Fundamentally, price is an indicator of

the worth of a product.

Price needs to be set at a level thatindicates that the benefits are worth the price,

indicates that the customer can afford the price,

the customer cannot obtain more value

from some other suppliers offerings.


3/25

3

Exhibit 10-1 Components of the Offering

Elementsofthe offering:

ProductServiceImage

Availability

QuantityEvaluatedprice

Supplierscreativelycombinecomponents

of the total offering thatcontributeto value for

specificcustomers.Componentsvary

dependingon specificcustomerneedsandthe customers cost

structure.

The customerperceivesprice as a cost in its offering.While somecustomersare

able to directly fundpurchases,othersrequire

financingassistance(GECredit Corporation

financescustomerpurchases).

Other customersmay requireJIT delivery while others

may find value in the brandor image of a particular

supplier, particularlyif thatimage can add value to thefinal product (Intel Inside).

Added value

Support activities

Direct activities


4/25

4

CostCost--Based PricingBased Pricing

Price is set by calculatingthe cost of an offering,

then adding a standard

percentage profit.

ValueValue--Based PricingBased Pricing

Price is set based onperceived customer value.

Cost-Based vs. Value-Based Pricing

CostCost--Based Price IssuesBased Price IssuesCosts depend on volume.

Costs assigned by

standard rates may have

no relationship to actual

costs.Price has no relationship

to customers perceptions

of the offerings worth.

ValueValue--Based Price IssuesBased Price IssuesMore difficult to implement

than cost-based pricing.

Need to establish the

evaluated price (the price ofthe offering from thecustomers perspective

after all costs associated

with the offering are

evaluated).


5/25

5

MaximumMaximum

PricePrice

The highest price a supplier can

charge for a product or service

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 fairprice is needed. Fair is afunction of customer perceptions of the offering value.

Competitor prices and total benefits delivered constitute

a reference points in determining what is a fair price.

MinimumMinimum

PricePrice

The price that covers the

suppliers relevant costs


6/25

6

Exhibit 10-3 Customers Perception of

Value andE

valuated Price$Equivalent

value

A has more value; customer choosesAthough B has more total benefits.

ValueValue

Evaluatedprice

Evaluatedprice

Total

benefits

Offering A Offering B

Totalbenefits


7/25

7

Value-Cost Model of Pricing

Need to analyze what activities subtract the

most from each customers profitability.

At the same time, we need to analyze howimportant a product is to the customers

creation ofvalue.

This indicates what each buyer can afford

and how sensitive the customer is likely to be

to price changes.


8/25

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 customers customer

1 = Key component, 2 = Significant component, 3 = Minor component

Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)


9/25

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 customers customer

1 = Key component, 2 = Significant component, 3 = Minor component

Cost percentage = Percentage of fixed costs (FC) or variable costs (VC)


10/25

10

Exhibit 10-5 Maximum and Minimum Price$

Equivalentvalue Customer view

Maximum

worth of A

Maximumprice per

unit for A

Minimum

price perunit for A

Attributablecost per unit

offering A

CostAcceptableprice range

Competitorsoffering B

Competitorsprice for B

Of fering A


11/25

11

Exhibit 10-6 Effect of Price Reductions on

Cost Coverage$

Attributable

costs

Allocated cost

of managers

salary

Original price

Original profit New price A

Loss

New price B

Contribution

to cover

managers

salary

Price cut A Price cut B


12/25

12

Exhibit 10-7 Demand and Supply Curves

QuantityQ

Elasticityat PQ

(slope of demand curve)

Price

P

Demand Supply


13/25

13

Relevant Costs

must meet the following four criteria

ResultantResultant

CostsCosts

AvoidableAvoidable

CostsCosts

ForwardForward--

lookinglooking

IncrementalIncremental

CostsCosts

RealizedRealized

CostsCosts


14/25

14

Relevant Costs:On-going revenues must pay for on-going costs

ResultantResultant

CostsCostsCosts that result from the decision

RealizedRealized

CostsCosts Actual costs incurred

ForwardForward--

lookinglookingIncrementalIncremental

CostsCosts

Costs that will be incurred for the

next units of product sold whenthe decision is implemented

AvoidableAvoidable

CostsCostsCosts that would not be incurred

if the decision were not made to

launch the offering.


15/25


16/25

16

Several Marketing Objectives Addressed by Pricing

Strategic PurposesStrategic 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 PurposesTactical 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


17/25

17

Introductory Pricing Strategies

PenetrationPenetrationPricingPricing

Charging relatively lowprices to enticeas many buyers as possible into the

early market. Penetration pricing can

assist in obtaining a dominant market

share an excellent defense to futurecompetition.

PricePriceSkimmingSkimming

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.


18/25

18

Introductory Pricing Strategies

PenetrationPenetrationPricingPricing

Conditions for skimming:Offering quality and image support the

higher price

Small volume production costs allow

profits at low sales volumeSufficient number of adopters at skim

price to justify effort

PricePriceSkimmingSkimming

Conditions for penetration:

Market must be price sensitive

Production and distribution costs must

fall as volume increases (economies ofscale)


19/25

19

Managing Pricing Tactics

BundlingSelling several products and/or services

together as one

Discounts &Allowances

Reductions in price for a special reason

(but some customers can get hooked onthem!)

Competitive

Bidding

Sealed bids involve private bids by

potential suppliers. In open bids,

competitors see each others bids.

InitiatingPrice Changes

Need to react and change marketing

activities as events unfold, such as

changes by competitors or customers.


20/25

20

Determining a Bid Price

Expected profit at a given price is calculated as

E(PF) = PW(Pr) xPF(Pr)

Where:

E(PF) = Expected profit

PW(Pr) = Probability of winning the bid at

price PrPF(Pr) = Profit at price Pr


21/25

21

Exhibit 10-9 Hypothetical Example of Profit

Expectations in a Competitive Bidding Situation

Cost Bid ProfitProb. of

Winning BidExpected

Profit

$20,000 $20,000 $0 .2 $0

$20,000 $22,000 $2,000 .5 $1,000

$20,000 $24,000 $4,000 .7 $2,800

$20,000 $26,000 $6,000 .5 $3,000

$20,000 $28,000 $8,000 .4 $3,200

$20,000 $30,000 $10,000 .3 $3,000

$20,000 $32,000 $12,000 .2 $2,400


22/25

22

Exhibit 10-10 Effect of an Industry Increase in Costs

QuantityQ2 Q1

PriceP2

P1

S2 S1


23/25

23

Exhibit 10-11 Two Types of Negotiating

Situations in B2B Sales

Situation

Stand-alone

Transaction

Balanced between

Transaction and

Relationship

Effective

bargaining

styles

Competitive;

Problem solving

Problem solving;

Compromising

Effective

approach Use of leverageSeek common

interests


24/25

24

PreparationPreparation

in negotiationin negotiation

is keyis key

Know your customers needs

and their relative importance.

Know the price range anticipated

by the customer.

Know who has the authority tomake 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


25/25

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.

H

ypercompetition:H

ypercompetition:

requires constant collection

of information on customer

value-cost models and

paying attention to yourcustomers customers and

their perceptions of value.

The Internet: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.

Value Based Pri

Documents