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Transcript of Negotiating price2
The MAANZ MXpress Program
Negotiating Price Dr Brian Monger
Copyright January 2013.
This Power Point program and the associated documents remain the intellectual property and the
copyright of the author and of The Marketing Association of Australia and New Zealand Inc. These
notes may be used only for personal study associated with in the above referenced course and not in any
education or training program. Persons and/or corporations wishing to use these notes for any other purpose
should contact MAANZ for written permission.
MAANZ International 1
MAANZ International
• MAANZ International, is a Not for Profit, internet based professional and educational
institute which has operated for over 25 years.
• MAANZ International offers Professional Memberships;
• Marketing Courses (Formal and Short)
• And Marketing Publications
• www.marketing.org.au
MAANZ International 2
Negotiating Price
• In many instances, customers do not pay a standard list price.
• Instead, the final price is determined through a process of negotiation between buyer and
seller.
• The negotiation process becomes necessary when neither of the parties to a transaction
has the power to impose its own will over the other(s).
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A Word about Price and Value
• The Oxford English Dictionary refers to value as `an estimate of worth or utility', which
would indicate that value is the outcome of some sort of assessment or estimate.
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Marketing as an Exchange of Value
• What is a market transaction all about? In essence it's about exchanging value. There must be something of value created by the
seller, offered and exchanged with something of value from the buyer.
•
• Customer value is represented in a series of trade-offs between what the customer gives
relative to what they receive. 5 MAANZ International
Creating Customer Value
• The job of any market-driven organisation is not to sell a product, but instead to create
value for customers.
• Value creation, is the source of competitive advantage in the marketplace.
• The fundamental purpose of any business is to create value where there was none before.
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Marketing as an Exchange of Value
•Various authors have provided variations on this simple approach such as:
•
•A trade-off between product quality and the price
• A trade-off between a set of benefits and specific categories of costs
• The hierarchy of derived benefits obtained from particular product attributes when using the product
• The resulting emotional, practical and logical worth associated with the product
•
•A trade-off between received value and desired value
• A customer makes investments in order to achieve a number of desired benefits. Similarly organisations also make a series of investments in order to achieve a series of designed benefits and outcomes.
• The actual set of benefits they both get out the exchange must be weighed against their investments.
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Pricing Problems are Universal
• For marketing strategists, Pricing is the moment of truth. All of marketing comes to
focus in the pricing decision.
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The Universal Approach is Simply Wrong
• One of their main problems is that they are not marketers and do not understand why
they should be.
• It is up to the marketer to understand why their target segments buy. Even if the physical
product is the same (eg 2 airlines) some simply prefer one over the other
MAANZ International
• Some like an organisations positioning/attitude (Virgin/Body shop) If you can develop a preference you can charge more
for it. You may choose not to charge more - but the objective of marketing is to increase
the preference.
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The Universal Approach is Simply Wrong
• Recent significant price rises in petrol showed that the industry wasn't anywhere near as
price sensitive as was once considered.
• I personally would fire any so called marketer who couldn't add value and get a better price
than the industry norm.
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Not Everyone Wants the Lowest Price!
But Everyone Wants the Best Value
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Not Everyone Wants the Lowest Price!
• There are many elements that can increase the value in any transaction (for both parties). That is, everyone gets better value out of the deal. Low
prices are seldom going to be able to provide much in the way of added value.
• When a marketer offers a low price, the profit margin per item falls. Perhaps an increase in volume will compensate for this. However, the
closer a price comes to breakeven (costs V income) the less value there will be for all concerned.
• The seller is closer to going broke and cannot offer any increased value to the buyer. If in fact they do go broke, the buyer has to find another
supplier.
• A strategy that has an over-reliance on price-cutting is an overly simplistic strategy. It is the easiest strategy for a rival to copy and the hardest
strategy to defend.
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• Industries that have firms focused on the belief that lower pricing is the strategy of
success will tend to develop price wars. Very low prices price lead to low margins per unit. Unless this is off-set by high volume (which is
becoming rarer in most markets) organisations and ultimately their customers will suffer.
• It is in every-ones interest
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• A firm with very low margins cannot undertake value adding activities or develop new products. Ultimately they will try to cut costs in areas that buyers consider core value
areas, and lose customers. Firms with low margins are always that much closer to going broke (with the resultant effect on suppliers, intermediaries and employees - not only the
owners).
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• Good marketing is not about lowering prices (any fool can do that really!). The job of a good marketer is to increase margins and deliver better value (not less) to buyers.
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17 5
To the purchaser, there are a number of ‘costs’
to be considered as part of the payment. They
include:
•Time Investment.
•Risk
•Opportunity costs What would be the best use of my money
at the present moment?
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The Lowest Price Is Likely to be the Worst Thing You Can Do
• The lowest price is usually bad for everything:
• Poor strategy
• Poor profitably
• Selling costs may rise
• Poor marketing
• Bad for brand image
• Makes future sales harder
• Defeats true loyalty
• A Low price focus is an exercise in stupidity
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Negotiating Price
• Do nots
• 1. Do not start with the belief there are no options.
• 2. Do not start with the price
• 3. Do not start with a low price and then follow-up with a discount
• 4. Do not create prices using only a cost based focus.
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Negotiating Price
• Do’s
• Start with a value based concept – not a cost based one
• Understand why buyers buy – It is always VALUE
• Understand value from the customers point of view
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Price Is A Creative Variable
Implicit in the argument that price must reflect value is the
need for flexibility in the methods used to establish prices.
"price is a variable.”
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Price Is Just One Element Of Your
Marketing Mix
Pricing is but one of the four strategic elements comprising the
marketing mix.
If marketers are to meet consumer demand profitably, they
cannot afford to reduce their relationships with their markets to
simple price-quantity terms.
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The main care must be to tailor prices to market requirements,
and present them to those markets as integral parts of
appealing composite offers and strategies.
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The underlying reason for much of today's ineffective pricing
is a preoccupation among those who set prices with the need
to cover costs.
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Costs and Buyer Evaluation
• A fundamental principle in market-based strategic pricing is to recognise that price is a statement of value, not a statement of costs.
One of the leading causes of new-product failure is a phenomenon of "price crunch." This is the situation where the firm charges a price that is significantly higher or lower than the
amount of value buyers associate with a particular purchase.
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It is reasonable to accept the economic axiom that prices paid
tell us something about consumer evaluations of products.
(i) the traditional demand theorem that 'the lower the
price, the greater the sales'.
(ii) the premium-pricing dictum: 'the higher the price, the
higher the customer valuation - so, the greater the sales'.
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Why Do buyers Buy?
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Understanding Buyers
• 1. Not everyone is the same – that’s why we segment and target.
• Understand the Price mind set (it affects both buyer and seller)
• The value for some customers is in “out negotiating” you. They just want to win.
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Value
Buyers' interest in price stems from their expectations about
the usefulness of a product or the satisfaction that they may
derive from it.
Because buyers have limited resources, they must allocate their
buying power so that they can obtain the most desired
products.
Buyers must decide whether the utility gained in an exchange
is worth the buying power sacrificed.
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Price And Value
A fundamental principle in market-based pricing is to
recognise that price is a statement of value, not a statement of
costs.
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Best Value.
The best value is the one that provides the most benefit (in
terms of the customer's desired set of attributes) for the least
price.
Value represents a buyer's overall evaluation of the utility of a
product based on perceptions of the net benefits received and
what must be given up.
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The amount that an organisation charges is both a determinant
and a reflection of the amount of value a buyer receives.
Price determines value because the customer is comparing the
benefits gained to the price given up (e.g., value for the money).
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Price also reflects or is a statement of value in that higher (or
lower) prices should correspond with more (or less) valuable
benefit packages.
Value Is Perceptual
A common mistake made by managers is to confuse actual and
perceived value.
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Product value, like product quality, has no
clear meaning except in terms of the needs of
particular customers.
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Buyers can encounter considerable difficulty when trying to
assess value. Their judgements are biased and emotional.
In addition, customers are usually looking at a combination of
factors when judging value, some of that may be different
from the factors considered important by managers.
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Understand the Price Mind set
• Everyone is doing it!
• The market is shrinking and there are a lot of competitors using low price as their marketing
tool.
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Creating Customer Value
Many successful organisations have come to a fundamental
realisation:
The job of any market-driven organisation is not to sell a
product, but instead to create value for customers.
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Firms create value in many ways. In fact, the possibilities are
virtually limitless. Improved quality, faster service, more
comprehensive warranties, unique features and options, better
delivery, easier ordering, and a convenient location are but a
few examples of sources of customer value. Value is created,
then, through product benefits.
Customers do not purchase a product per se. What they are
actually buying is a set of need-satisfying benefits.
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The primary aim must be to offer products formed in
consonance with consumer demand, at prices compatible with
consumer evaluations and corporate sales/profit objectives.
Consumers value many other things apart from price.
Competition never occurs only in terms of price.
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Customers frequently do not purchase the item with the
highest quality, but they do tend to consider only those
products that meet minimal quality standards.
Further, some observers assume that quality is directly
associated with price. That is, higher price serves as an
indicator of higher quality.
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Where buyers are confused about the
attributes and performance capabilities of an
item, they will tend to use price as an indicator
of quality.
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Adding Value
• Customer service as the potential success. Reward major customers for their loyalty
• Try not to buy loyalty – earn it.
• maybe movie tickets?
• Maybe thank you letters to some smaller customers sometimes to make feel
appreciated? MAANZ International
• For more information about MAANZ International and articles about Marketing, visit:
• www.marketing.org.au
• http://smartamarketing.wordpress.com
• http://smartamarketing2.wordpress.com
• . http://www.linkedin.com/groups/MAANZ-SmartaMarketing-Group-2650856/about
• Email: [email protected]
• Link to this site - - http://www.slideshare.net/bmonger for further presentations
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END
MAANZ International