Industrial Pricing h

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INDUSTRIAL PRICING STRATEGIES

AND

POLICIES


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Understand the special meaning of price

Know the factors that influence pricing decisions, i.e.

price determinants

Understand pricing strategies for different

product/market situations

Examine the pricing policies for various types of

customers

Understand the role of leasing


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INDUSTRIAL PRICING

Suggested Readings

Industrial Marketing

By

Havaldar, Chapter 11

Tata McGraw Hill

3


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SPECIAL MEANING OF PRICE

Some business customers follow Value-based pricing by

evaluating, suppliers offerings based on the concept of the suppliers

offering equal to the difference between the perception of value (or

benefits) and the cost to the buying firm. These are value buyers,

and marketers should attempt to have value added relationship, if

suppliers have purchasingorientations.

Perception of value in value-based pricing is made up of several

elements like customers perceptions of product quality /

performance, reliable delivery, warranty / after-sales service,

reputation of the supplier, etc which are enhanced and augmented

properties.


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Cost to the buying firm includes basic Price, freight, transit

insurance, installation, risks of product failure, delayeddelivery, etc,

Some customers are price buyers, Marketers, should

follow transactional relationships & offer basicproperties.

Some other buyers are loyal buyers, for whom marketers

should follow relationship marketing with partnering /collaborative approach and mutually acceptable prices.


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FRAMEWORK OF PRICING DECISIONS

(i) Pricing objectives

(ii) Customer analysis

(iii) Cost analysis

(iv) Competitors' analysis

(v) Govt. regulation / policies

Before taking pricing

decisions, a buying firm must

find "price determinants".

(i.e. factors that influence

pricing decisions)


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Two types of pricing decisions.

Pricing strategies Pricing policies

Setting a price

(product / marketsituations)

Initiating a

price change

Responding to a competitor's

price change

Discounts

Geographical

pricing

Leasing

Competitive/ Tender Bidding

Across PLC

New Product


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PRICE DETERMINANTS OR FACTORS

INFLUENCING PRICING DECISIONS

(i) Pricing objectives, (ii) customer analysis, (iii) cost

analysis, (iv) competitive analysis, (v) Govt. policies.

1. Pricing Objectives

Are derived from corporate and marketing objectives.

Some of the pricing objectives are survival, maximum

short term profits, maximum short term sales,

maximum sales growth, product quality leadership, etc.


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2. Customer (Demand) analysis

It includes demand analysis & cost - Benefit analysis

(i) Demand analysis. Using experimental research, itmeasures relationship between price and demand (or

sales volume). It sums up how sensitive customers

are to the price changes. The formula is:

If PED is > 1, demand is elastic, & customers are price sensitive

If PED is < 1, demand is inelastic, customers are less sensitive to prices.

=% change in quantity demanded

% Change in price

Price elasticity of demand

(PED)


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(ii) Cost Benefit Analysis

Necessary to know target customers perceptions of benefits (or value)

and costs.

Benefits are categorized into hard (or tangible) benefits like quality,

production rate, performance, etc. and soft (or intangible) benefits like

customer service, company reputation, warranty period, etc.

Cost includes price, duties and taxes, freight, installation, maintenance.

3. Cost Analysis

A firms total cost of a product is the lowest point on the price range.

Hence, for pricing decisions, the marketer must know the various types of

costs like fixed, variable, total, direct, etc. for a product / service.

Costs vary based on production capacity (i.e. economies of scale), and

accumulated experience (i. e. learning curve) as shown.


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Costper

Unit

Quantity Produced per year

Cost

per

Unit

Accumulated Production

Experience /

Learning

Curve.Av. Cost Reduction

= 10-30%

Economies of Scale


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Sales

&Costs

Sales Volume

Sales Revenue at P3

Sales Revenue at P2

Sales Revenue at P1

Total CostFixed Cost

Break - Even Analysis is useful to consider different

prices (P1, P2, P3), and its effect on sales revenue and profits.


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4. Analyzing Competition

Many marketers have competitivelevel Pricing asa pricing objective.

Marketers should get Competitors prices,

discounts, costs, product quality, service, etc forcost/benefit analysis, pricing and positioning

strategy.

Competitors information can be obtained fromvarious sources.


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5.Government Regulation/Policies

Govt. regulations are necessary to ensure fair play

and to protect consumers and small scale suppliers.

Price-fixing / price cartels, price discrimination (e.g.

different discounts to distributors/dealers), and

predatory pricing (e.g. dominant firm aiming to

finish competitors) are not permitted (illegal as per

MRTP act, for example)


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PRICING STRATEGIES

Pricing strategies vary as per product-market

situations such as (i) Competitive bidding in

competitive markets, (ii) New product pricing, (iii)

Pricing across product life-cycle.

(i) Competitive Bidding

In business markets, large volume of purchasing is

done through competitive bidding, using either closed(or sealed) bidding or open (or negotiated) bidding

method.


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In closed bidding, often used by the Govt. buyer,

sealed bids are invited through newspaper tendernotices. Sealed bids are opened in presences of

suppliers and orders are placed on the lowest

price bidder(s).

In open bidding, after receiving bids (quotations),

the buyer negotiates technical and commercial

parts with suppliers, and then places orders. Thismethod is often followed by commercial

enterprises in private sector .


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Strategy / Model Used for Competitive Bidding

One of the often used strategies isProbabilistic Bidding,which

makes two assumptions :

(i) Pricing objective is profit maximizations,

(ii) Lowest price bidder will get the order

Equation used : E (A) = P (A) x T(A), where A=Bid price, E(A) =

Expected profit at bid price A, P(A) = Probability of winning (or

getting order ) at the bid price A, T(A) = profit, if bid price A is

accepted.


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An Application (example) of probabilistic Bidding Strategy

Rs.60 corers tender from Dept. of Telecomm. (DOT) for underground cable jointing

kits. The company ghosted Rs.400/- per kit (expected maximum profit). Tender

opening revealed, it was L4.L1 was Rs. 330/-, L2=350, L3=Rs 380/- The company

estimates of B and P(A) were incorrect.

BidPrice

( Rs) (A)

Total CostPer Unit(Rs) (C)

Competitor's

Last TenderPrice(Rs) (B)

Profit (Rs)=

(A) - (C)T (A)

450

430

410

380

360

340

330

400

350

350

350350

350

350

350

350

360

360

360360

360

360

360

360

0.00

0.15

0.400.50

0.72

0.90

0.95

1.00

100

80

6050

30

10

(10)

(20)

0

12.00

24.00

21.60

09.00

(9.50)

(20.00)

25.00

Probability

For getting orderAt A Price= P (A)

Profit (Rs)=E (A)

Expected

P (A) T (A)X


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(ii) New Product Pricing Strategy

In the introduction stage of a new product, two alternative

pricing strategies are available

(i) Skimming (high initial price) strategy, and

(ii) Penetration (low initial price) strategy.

Skimming Strategy is appropriate for a new product that is

distinct, hightech, or capital intensive, and purchased by a

market segment that is not sensitive to the initial high price. The

advantage is faster recovery of investment by generating larger

profits. The disadvantage is that it attracts competitors due to

high profits. The firm reduces prices after some time to reach

other segments.


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Penetration strategy is appropriate when (i) buyers are

highly price sensitive, (ii) strong threat exists from

potential competitors (due to low entry barrier). The selling

firms objective is to achieve long term profits through

high market share. The firm can also achieve cost

leadershipthru economies of scale and experience curve,

which gives competitive advantage.


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(iii) Pricing Across Product Life Cycle (PLC)

Marketing and pricing strategies vary as the product moves

across 4 stages of PLC.

(a) Introduction stage: We have discussed pricing strategy

in this stage earlier in pricing a new product.

(b) Growth stage: The firm lowers the prices to attract the

next layer of price sensitive buyers. Also more suppliers

enter the market and buying firms put pressure on the

existing suppliers to lower prices.


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(c) Maturity stage: The firm may cut the prices to match

aggressive competitors prices by giving volume discounts,

absorbing freight costs, or more credit. If industrial customers docost - benefit analysis, a selling firm may increase prices or not

make any change in prices due to its superior product quality.

(d) Decline stage: Pricing strategy varies depending onconditions. (i) If buyers perceptions about the firms quality of

product / service is good, then the price need not be lowered, but

costs should be reduced to earn profits, (ii) if the quality of

product / service is equal of lower than competitors, a firm may

cut prices, to increase sales volume above break even volume,

(iii) if some competitors have withdrawn, a firm may selectively

increase prices to less price sensitive segments.


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Initiating price changes

If a firm is a market leader and wants to change the price, it must

anticipate reactions from customers and competitors.

The firm must study major competitors objectives, financial

situations, production capacity utilizations, sales, costs, and

profits. It must also understand competitors mind-set, by

studying their business philosophy (or concepts), culture, beliefs

and past behaviors. Based on above analysis the firm should

predict competitors response.

The firm must also understand that customers generally prefersmall price increases several times, rather than one sharp

increase. Of course, customers would generally welcome price

cuts.


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Responding to competitors price changes

A marketer should respond after answering the following questions:

(i) Why the competitor has changed the price?

(ii) Is the price change temporary or permanent?

(iii) What will happen to the companys sales and profits, if it does not

respond?

(iv) What would be the reactions of other competitors?

The responses can be in several ways:

(a) maintain price and value (benefits), (b) match competitors price, (c)develop and launch low-price product item, (d) maintain price. The right

response depends on the business situations faced by the firm.


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PRICING POLICIES

Purpose: A firm evolves pricing policies to adjust basic prices (or price

list) for different types of customers (like OEMs, users, and dealers) who

buy various quantities and are located at different locations. The price

list is adjusted with different types of discounts and allowances.

Price list is a statement of basic prices of a product, having various

sizes/specifications.

Net price = price list (or list-price) less discount (or allowances).

Business buyers are more interested in net price

Types of discounts : Trade, quantity (or volume), and cash.

Trade discounts: It is offered to traders or intermediaries (dealers /distributors / stockiest ) and it should be equal and sufficient (as per

industry norms or functions performed). e.g. price list (100) trade

discount (15) = net price (85)


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Volume / Quantity discounts: Here, the objective is to encourage

customers to buy larger quantities, which would reduce the costs of

selling, inventory carrying and transportation. The quantity (or

volume) discounts are given either on single orders over a period,

usually one year (cumulative basis). For example,

Above discounts are applicable for all types of customers

OEMs, users, and dealers / distributors.

Size of each

Purchase order

Yearly Total

Purchase

% Quantity

Discount

Less than 5 nos.,

5 - 10 nos.,

11 -15 nos.,

> 15 nos.,

Less than Rs. 5,000

Rs. 5,000 - 10,000

Rs. 10,000 - 15,000

> Rs. 15,000

Nil

upto 3

upto 6

upto 10

or

or

or

or

,

,

,

,

or


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Cash Discounts: The objective is to get prompt

payments. If a credit customer pays the bill beforedispatch or within 7-days of dispatch, the customer is

given cash discount on the gross amount of bill. The

extent of cash discount depends on the bank rate of

interest. Give cash discounts thru credit notes and

the cheques, instead of including it in the bills.

Geographical Pricing

It includes decisions on how to price the companys

products to customers located in different geographic

areas. There are two alternatives :


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(i) Ex Factory Pricing: It means prices quoted are based on

the prices at the factory gate, i.e. freight

( transportation costs) and transit insurance costs are to the

customers accounts. Hence, the landed price (or costs) to

customers vary depending on their geographic locations.

(ii) F.O.R. Destination Pricing: Here, the quoted prices include

freight costs. Transit insurance is a small amount to be covered

by the customers open insurance policy. Hence, all

customers get the product almost at the same price, despite

different geographic locations. Marketer adds the average

freight cost to the basic prices and then prepares the price

list, or absorbs the freight cost, if competition demands.


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Taxes and Duties: Knowledge of excise duty, sales

tax, octroi, entry tax, road permits etc is

essential for sales and marketing persons, since

they have an impact on the landed price (or costs)

to business buyers.


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ROLE OF LEASING

Business buyers have options of either leasing or

buying capital items like machinery. The advantages

for the lessee (asset user) are : (i) conserving capital,

(ii) gaining tax advantages, (iii) getting the latest

products. The lessor (asset owner) often earns good

income from buying firms who can not afford outright

purchase.

A lease is a contract (or an agreement) by which the

asset owner (lessor) gives the right to use the asset to

another party (lessee) in return for payment, over a

specified period.


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Types of Leases:

(i) Financial (or full payment) leases, and

(ii) operating (service or rental) leases

Financial leases: These are full payment, non -

cancellable, long - term contracts and fully

amortised (sum of lease payments purchase

price of capital item)

>


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Operating Leases are service/rental leases, that are cancellable,

short-term contracts or agreements, and are not fully amortised.

The rates are higher than those of financial leases, because risk

of obsolescence are of the lessor

Pricing Strategy

It is based on the firms marketing and pricing objectives. Threepossible alternatives are :

(i) Decide lease rate to favor leasing

(ii) Decide lease rate to favor outright purchase

(iii) Achieve balance between lease rate & sale rate. Somebusiness marketing firms have representatives for giving

financial consultancy services to buying firms on leasing or

buying.


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SUMMARY

In business marketing, price has a special meaning. Forvalue buyers, value based pricing is appropriate.

Factors that influence pricing decisions (or price

determinants) are: (i) pricing objectives, (ii) customeranalysis, (iii) competition analysis, (iv) cost analysis (v)

government regulations/policies

Pricing strategies for different product-market situations

are: (a) competitive bidding in competitive markets, (b) new

product pricing (c) pricing across product life cycle.


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Initiating price changes and responding to competitors

price changes are also parts of pricing strategies.

Pricing policies include adjustment of basic prices (or price

list) with different types of discounts like volume, trade, and

cash, as well as geographical pricing.

Leasing or buying options are available to business buyers

for capital items like machinery. Financial and operating are

two types of leases. Pricing strategies are made either to

favour leasing or outright purchase, or balance between

leasing and buying .

Industrial Pricing h

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