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Price Planning and Strategy

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Major Factors Influencing Price Decision

Internal factors• Company (pricing)

objectives• Marketing mix value to

customers• Costs• Impact on other

products• Product differentiation

External factors• Buyers’ Perception of value• Demand• Economic considerations• Ethical considerations• Competition• Suppliers• Government/legal

considerations

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A broad perspective needed in examining the costs a particular alternative may A broad perspective needed in examining the costs a particular alternative may present for the buyer. present for the buyer. Rather than making a decision on the basis of price alone, organizational Rather than making a decision on the basis of price alone, organizational buyers emphasize the buyers emphasize the total cost in usetotal cost in use of a particular product or service. of a particular product or service.

Customers’ Cost-in-Use Components

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Canadian Competition Act Makes it illegal to discriminate in price among different

buyers of commodities of like grade and quality when the effects result in a reduction in competition at the sellers’ level, at the buyers’ level, or at the buyers’ customers’ level.

Different prices can be charged if the difference does not exceed the difference in actual costs of serving the different customers. For Example: There could be a transportation cost difference if one customer was closer than the other; There could be a packaging cost difference if one customer required special packaging.

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Legal Considerations Price Fixing – collaboration among sellers

Exchanging Any Price Information – collaboration among sellers

Predatory Pricing – pricing at or below cost to drive competition out of the market.

Question: If China sets an exchange rate that significantly under values their currency, their product costs become low versus U.S. produced products. If entire U.S. industries are driven out of business, is China guilty of predatory pricing (or are they just aggressive competitors)? This question would be an issue for the World Trade Organization.

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Fig. 15.2

Key Components of the Industrial Pricing Process

There is no easy formula for pricing There is no easy formula for pricing an industrial product or service. an industrial product or service. The decision is multidimensional.The decision is multidimensional.The each interactive variable The each interactive variable assumes significance.assumes significance.

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Price ObjectivesPrice Objectives The pricing decision must be based on The pricing decision must be based on

objectives congruent with marketing and objectives congruent with marketing and overall corporate objectives.overall corporate objectives.

The marketer starts with principal objectives The marketer starts with principal objectives and adds collateral pricing goals:and adds collateral pricing goals:1. Achieving a target return on investment,1. Achieving a target return on investment,

2. Achieving a market-share goal,2. Achieving a market-share goal,

3. Meeting competition3. Meeting competition..

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Price Elasticity of DemandPrice Elasticity of Demand

The rate of percentage change in quantity The rate of percentage change in quantity demanded attributable to the percentage demanded attributable to the percentage change in price.change in price.

Factors of price elasticity,Factors of price elasticity,- The ease with which customers can compare - The ease with which customers can compare

alternatives.alternatives.- The importance of the product in the cost structure.- The importance of the product in the cost structure.- The value that the product represents to a customer.- The value that the product represents to a customer.

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Pricing Methods Marginal pricing (contribution pricing): Attempts to maximize

profits by producing number of units at which marginal cost is just less than or equal to marginal revenue.

Economic value to the customer: A higher price will be paid by buyers who perceive a greater value or benefit to them than what they would receive from buying a competitive product.

Break-even analysis: The point at which a firm’s revenue will equal its total fixed and variable costs at a given price.

Target return on investment pricing: An annual ROI target (i.e., ROI of 20% over cost). Typically done by a mix of individual product markups over cost that average the target ROI.

Cost-plus pricing: A version of target ROI pricing in which all products are marked up by the same percentage.

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Target costingTarget costing features a design-to-cost philosophy that begins by features a design-to-cost philosophy that begins by examining market conditions: examining market conditions:

- Identifies and targets the most attractive market segments.- Identifies and targets the most attractive market segments.- Determines what level of quality and types of product attributes will be - Determines what level of quality and types of product attributes will be

required to succeed.required to succeed.

Target Costing

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Under certain conditions, followers into a market may confront lower initial Under certain conditions, followers into a market may confront lower initial costs than did the pioneer. By failing to recognize potential cost costs than did the pioneer. By failing to recognize potential cost advantages of late entrants, the business marketer can dramatically advantages of late entrants, the business marketer can dramatically overstate costs differences.overstate costs differences.

Selected Cost Comparison Issues: Followers Versus the Pioneer

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Zero-Based Pricing Zero-based pricing (ZBP): Actually not a pricing method as

much as it is the accounting of the method to the customer, and the resulting requirement to maintain consistency.

With ZBP, buyers do not accept that an increase in price of one cost element will necessarily justify a price increase. Supplier is required to show actual cost of every element (from base zero)—perhaps other elements have gone down in cost; perhaps supplier has allowed some controllable costs to increase and should not pass those along to customer; perhaps supplier’s profit margin is already too high.

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Pricing New ProductsPricing New Products

SkimmingSkimming- Appropriate for a distinctly new product, provides the firm with an opportunity - Appropriate for a distinctly new product, provides the firm with an opportunity

to profitably reach market segments that are not sensitive to the high initial to profitably reach market segments that are not sensitive to the high initial price.price.

- Enables the marketer to capture early profits.- Enables the marketer to capture early profits.

- Enables the innovator to recover high developmental costs more quickly.- Enables the innovator to recover high developmental costs more quickly.

PenetrationPenetration is appropriate when there is is appropriate when there is- High price elasticity of demand,- High price elasticity of demand,

- Strong threat of imminent competition,- Strong threat of imminent competition,

- Opportunity for a substantial reduction in production costs as volume - Opportunity for a substantial reduction in production costs as volume expands.expands.

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Pricing Across Product Life Cycle(Life-Cycle Costing)

Introduction phase:• Price skimming: Introductory price set relatively

high, thereby attracting buyers at top of product’s demand curve.

• Market penetration pricing: Low price is used as an entering wedge.

Growth phase Maturity phase Decline stage

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Price-Leadership Strategy

Price-leadership strategy: One or a very few firms initiate price changes, with most or all the other firms in the industry following suit.

When price leadership prevails, price competition does not exist. The burden of making critical pricing decisions is placed on leading firm(s) and others simply follow the leader.

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Competitive Bidding

Competitive bidding: Buyer sends inquiries (requests for quotations - RFQs) to firms able to produce in conformity with requested requirements.

Requests for proposals (RFPs) involve the same process, but here buyer is signaling that everything is preliminary and that a future RFQ will be sent once specifics are determined from the best proposals.

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The Process that Leads to a Competitive Price Bid

The many factors that influence the pricing decisions of a strategic marketer have been listed on a previous slide.

The estimated costs to product the product and supply the services the customer requires is almost always a major element in the final bid price.

The process of estimating internal costs should closely analyzed for accuracy. The overstatement of costs can mean lost bids.