Pricing Strategies in Business Marketing

By Prof. Raghavendran.V

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What is Meaning of the Price?

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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.

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A business marketing firm has to consider many factors in its pricing decisions and they are:

1) Pricing objectives2) Demand analysis3) Cost analysis4) Competitive analysis5) Government regulations

Factors influencing Pricing decision

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It is derived from the corporate and marketing objectives.

1. Survival2. Maximum short term profits3. Maximum short term sales4. Maximum marketing skimming5. Product-quality leadership6. Other pricing objectives

Pricing Objectives

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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

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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

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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

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Production costsAccumulated experience helps in reduction of costs

The effect of break-even analysis on costs & sales volume

Cost Analysis

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Fixed, Variable, Semi Variable, Indirect and Direct costs

Production Costs

TFC

AFC

Production

Costs

Total Fixed Costs & Average Fixed Costs

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Total Variable Cost

TC

FC

TVC

TFC

Total Cost

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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

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

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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

AvgCostPer Unit

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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

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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

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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:

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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 PricingValue Based PricingCustomer Determined PricingCompetition Based Pricing

Pricing Methods

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1. Competitive Bidding & negotiation2. Pricing New products3. 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

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Three variables are used in this technique: Amount or price of the bidExpected 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 RsE(A)=Expected profit at bid price AP(A)=Probability of acceptance of the bid price AT(A)= Profit, if the bid price A is accepted

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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

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Key Terms Associated with pricingDiscounts

List PriceTrade DiscountsQuantity DiscountsCash Discounts

Geographical pricingEx-factoryFOR & FOB destinationTaxes and Levies

Pricing Policies

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

The lessee has to pay in form of rentals and lessor remains the owner of the equipment during the specified period.

There are 4 types of leases viz,Operating LeaseFinancial LeaseSale and lease back transactionLeveraged lease

Leasing

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1. What are the important factors which affect industrial pricing?

2. A power transformer manufacturing company wants to quote in response to a closed tender notice from a state electricity board, valued at Rs 80 Crores. If you were working in the company’s sales office and your senior asks you to recommend a strategy to win the contract and also make a profit, what will be your response? ( make suitable assumptions)

3. Why leasing is gaining importance in business marketing for capital goods?

Assignment time: Submit by 26-9-11