Importance of pricing in Industrial Markets Pricing is an indispensable part of Industrial marketing strategy. For two reasons, price must be viewed as a part of the product offering as well as a separate element in the marketing mix. First, from the buying firms perspective, it is the cost that must be weighed against product quality, delivery, and supplier service. Second, from the sellers point of view, the price charged determines the profitability of the product and provides the margins necessary to support other aspects of product offering, such as post purchase service and technical assistance. To the industrial buyer, price is only one determinant of the economic impact that the product will have on the firm. Buyers are concerned with the evaluated price of a product, i.e. Total cost of owning and using the product. Such costs include, in addition to the sellers price, transportation charges, the cost of installing capital equipment, inventory carrying costs for parts and materials, order processing costs, and less apparent costs such as production interruption caused by product failure, late delivery, or poor technical support. This distinction between cost and price is important and should not be overlooked by the industrial marketer. Factors Influencing Pricing Strategies 1) Customer Demand 2) Nature of Derived Demand3) Competition4) Cost and Profit relationships 5) Markets reaction to and perception of price6) Government RegulationsCustomer DemandIndustrial market is diverse and complex. A single product may be used in many different applications and have varying usage levels across individual firms and market segments.The importance of the product to buyers end products may also vary. For these reasons, potential demand, sensitivity to price, and potential profitability differ across market segments. In setting price to influence demand, therefore industrial marketers must understand how products are used, recognize the potential customer benefits, examine the cost of owning and using the products, and determine product values from the customers perspectives.Thus the three things should be taken into consideration :>> Analyzing Customer benefits>> Analyzing customer costs>> Price Sensitivity Demand analysis seeks to analyze customers perception of values, the relative importance of price when customer makes purchase decision, the size of the market and different price levels. (Source : Morris and Calantone, 1990) One such research shows that a high price tends to limit the potential market for the product, while a low price tends to expand the market. In a competitive market, the principle forces that determine price charged and the quantity produced and sold are contained in the prevailing conditions of supply and demand. The less competitive the market, the less the interaction of supply and demand. (Source : Dodge and Hanna, 1995)The Nature of Derived Demand Derived demand means that sales to an Original Equipment Manufacturer (OEM) ultimately depend on the level of customer demand for products that the OEM makes. Total quantity demanded by the OEM for component parts, raw materials, capital equipment and ancillary services will increase only as a result of increased purchases by end-product users. Because of the relatively distant relationship between an industrial supplier and an ultimate consumer, what was a direct relationship between price and quantity demanded in the consumer market becomes an indirect and often reversed relationship. Competition Many industry marketers regard competitive level pricing as the most important pricing strategy. An industrial firm should get the information on not only the competitors prices and cost but also about the competitors product quality, technical expertise and delivery performance. The information on competitors can be obtained in several ways. The firms sales people and dealers can ask the buyers about the quality, prices, services and delivery performance of the competitors during their sales call. Sometimes firms send their people posing as buyers to competitors firms to obtain competitors information either directly or as percieved by the buyers. The company can buy competitors product and take it apart to estimate the cost of production. Once the industrial firm gets the information about the competitors product, it can use price to position its product vis--vis competitors. This means that if a firms product quality is superior to all its competitors and its services (including delivery, after-sales etc.) is equally good, it can price its product higher than the competitors. However if the firms product and services are similar to the competitors then its price should be similar to that of major competitors prices.(if it decides to price its product higher it would lose its sales)

Cost and Profit Relationships Costs set the lower limits of a product. Costs varies over time and fluctuate with volume. Costs must be considered in relation to demand, competition and the market share objectives of the firm. Marketing, production and distribution costs are all relevant to the pricing decision. Various elements of cost like fixed , variable, direct, indirect, etc react differently to changes in the production quantity. Therefore a marketing manager should determine which costs are volume dependent, which products or markets generate the costs, and where opportunities for additional profits might exist. Markets reaction to and perception of price A firm must know what customers want in terms of product performance As well as the price they are willing to pay, before it begins the physical development of the product. In this way a firm becomes able to decide the upper limit price of its product, resulting in more profitable sale. Many industrial products fail just because of the wrong market perception of price. Therefore the marketing department should rightly specify price-performance relationships as per the value perceptions of customers. Government Regulations Business marketers must be aware of the effect of Government regulations on pricing decisions. Though we have a 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. For instance price-fixing or price cartels are illegal, as per Monopolies and restricted Trade Practices (MRTP Act). In a real world example, the US Dept. of Justice fined several companies and individuals, including some CEOs.

Cost Behavior over time - The Learning Curve Also known as experience curve BCG in 1972 First recognized by Boeing in 1950s They saw that no of hrs needed to build an aircraft decreased by abt 20% each time the cumulative production doubled BCG found similar results in other industries as wellKey Instructions with Learning Curve It is volume dependant, not time dependant which means as a product line matures, it takes longer to realize any given percentage of cost reduction In simple words, it takes longer to achieve the 10%, 15% or 20% reduction in cost Cost savings are not limited to the production process Managerial decision making, product and process designs and good distributive systems can all become more cost effective. The L-C concept is not the same as economies of scale (EOS refers to relative production efficiency at diff quantity levels at any given point of time) it deals with accumulation of quantity over time and is independent of the rate of production.

Strategic Use of L-C Penetration Strategy An industrial firm, aiming for a dominant position in a new product market segment will adopt an aggressive pricing strategy. So the price will speed up market growth as well as discourage potential competition

Other uses of L-C Covers sunk costs effectively Enhances mktng efforts Develop new mkt opportunities Increases RnD expenditures Raises needed working capital Expands production capacityEffects on Pricing analysis (Pg 512 V.Imp.)

Competitive Bidding Significant amounts are purchased through Competitive Bidding in IMs This system is used as a means of exploring and determining price levels when purchasing non standardized, complex products on which manufacturing methods may vary. Majorly those items that do not have an established market price. Competitive Bidding can be closed/open Formal invitation to potential suppliers, submitted in sealed bids At a decided time, all bids are opened and reviewed. Open Bids are more informal where one may write or say orally. Costly, time consuming Sometimes contracts are given to the lowest responsible bidder This means that award is based on the suppliers promise and ability to deliver, past experience with the bidder and his technical, managerial and financial capabilities.Questions if there is a price cut by a competitor, what strategies should be used to manage these price cuts?