Pricing

Pricing Price

Marketer Revenue-Maximize

Buyer Cost- minimize

pricing strategy – try to balance and get a strategic fit to decide on this, elementalize and analyze the factors that influence

factors 1. CUSTOMER DEMEND

Because it is derived, business buyer is more concerned with “WHOM TO BUY FROM AND WHY instead of WHETHER OR NOT TO BUY Looks at total cost of ownership Evaluated pricing

Price sensitivity 2.NATURE OF Demand is derived DERIVED DEMAND What happens if supplier reduces price in an attempt to increase the share of business? 3.COMPETITION Competitive level of pricing is generally OK Marketer can have latitude in pricing if the Product is differentiated by functional design, dependable service Price leadership- Oligopolistic price Increase-Shake out and align Decrease- business will not increase

factors 4. COST / PROFIT Competition RELATIONSHIP

– upper limits on price

Cost- lower limit It makes sense to look at the costs but not just cost alone Fixed costVariable- linked to output Semi variable- Repair & maintenance Allocated costs- Over heads Sunk costs- resources already acquitted and you cold do nothing about it now.

Cost analysis -continued •Learning curve-BCG 1972 •Started in 1950 when Boeing realized that # hours on assembly reduced by 20% each time production doubled •It was not just labor hours •It included volume related issues like defective parts, machine downtime, procurement cost ( moving to straight re-buy) •Distribution costs •Managerial decision making •Designing •Reduction is variable or volume related costs •It is volume dependent and not time dependent •Learning curve is often used with penetration pricing •Learning curve should not be used as a strategic tool

Pricing across PLC

Introduction 1Skim 2Penetrate

Growth Non price competition

Time

Maturity Differentiation Is minimal PRICE WARS

Decline If you remain, you will make some money laggards

Pricing policies Trade Discounts Given to the middleman Generally increased numbers Quantity discounts Individual order Cumulative on an year Cash discounts 2/10 net 30 Two percent less if paid within 10 days what is supposed to be paid in 30 days Geographic pricing More Relevant internationally

Selected Trade Terms EXW

FCA

FCA

FAS

(Named Inland Carrier at Named Inland Point of Departure

(Named Inland Carrier at Named Inland Port of Exportation

(Named Port of Shipment)

Origin (Factory, Mine, Plantation, Warehouse)

Inland Carrier

India

Dock at Port of Shipment

F.O.B. Vessel (Named Port of Shipment)

Vessel

Selected Trade Terms CFR

Vessel

CIF

FAS

DDU / DDP

(Named Port of Destination

(Named Port of Shipment)

(Named Place of Destination)

Dock at Port of Destination

Inland Carrier

Country of Destination

Destination

Strategic role leasing 1. 2. 3. 4. 5. 6. 7. 8.

9.

Study the tax laws in the location where you are marketing Account as expense It utilizes pre tax rupees If it is a sale it uses post tax rupees Minimizes equipment disposal problems Control through debt servicing- debt servicing Ideal for capital goods This has opened an avenue for those who were at cross roads Leasing arrangements 1. Direct to customers 2. Lease to FI

Price Determinants Customer

Costs

Competitors

Price • Industrial Buyer – Pragmatic and Fact oriented • Industrial decisions are not completely emotionless always nor consumer decisions are totally irrational • Industrial Products have direct impact on seller and buyer • Price - carefully interrelate to: • Product, • Distribution, Total offer responsive Yet should generate • Communication strategies To market needs Profits

Price- A Crucial element in product strate • Distinction – Price for seller is Cost to the buyer Supplier

Price

Evaluates cost w.r.t Quality Delivery & Service

Keeps in mind Profitability &Margin

Cost

Buyer

Price- A Crucial element in product strate • Distinction – Price for seller is Cost to the buyer 1.Amount of Buyers Capital Investment

Price

2.High Price may Offset savings on using the product 3Low price may lead to higher Operating costs, shortened PL

Reflection of Product efficiency

Cost

Factors that Influence Pricing Strateg • Customer Demand • Resultant of derived demand • Whom to Buy from & Why? rather than whether or not to Buy – assume -not considering make or buy • What happens – single product and multiple application- differs from segment to segment • Analyzing Customer benefits 1. Functional benefits (design & functions) 2. Operational benefits (reliable &

Factors that Influence Pricing Strateg • Analyzing Customer Costs • Life cycle costing analysis • Maintenance • Repair and maintenance • Operating costs • Price Sensitivity • Design Engineers- performance variables • Production engineer- reliable, delivery • Purchase - price

Factors that Influence Pricing Strateg • Nature of Derived Demand • Price Vs Quantity – elastic or inelastic is difficult to predict here • Chances of reversal effects are high • Decrease the price and you think that demand will increase? • Price reduction is not a factor for procurement because he decides From whom to buy and not from whether to buy • Reduction, not forced by competitive forces may result in Is the quality a suspect? • This is reversal effect

Factors that Influence Pricing Strateg • Competition • Competitive level pricing – most important • Anticipated reaction of Competitors • Price reduction • If products are undifferentiated, then competitors will reduce the price • Or differentiate their offer • Price leadership • Price Increase • Competitors won’t • Loss of market share • Leader can’t be dominant generally

Factors that Influence Pricing Strateg • Costs • Fixed cost – Rigid cost • Variable cost -flexible cost • Semi variable cost • Costs that fluctuate with changes in output but not in direct proportion to quantities produced ( R & M) • Direct Cost • Indirect Cost Allocated cost • Sunk Costs

Factors that Influence Pricing Strateg Marginal cost & Contribution analysis

Factors that Influence Pricing Strateg • Cost Behavior over time: • Boeing Recognized this in 1950 • # hours required to build aircraft reduced by 20% each time cumulative production doubled • GM / GE / IBM / TI – noticed and agreed • They added, it is not only labor hours but volume related cost factors reduced like Scrap / defective parts / machine downtime etc • BCG developed this concept in 1972 • What is this ?

Factors that Influence Pricing Strateg • Cost Behavior over time: Learning Curve • Important Distinctions • LC is volume dependent and not time dependent • Cost savings is not limited to production processes alone. Managerial decision making, product and process design, distribution system, marketing programs will also indicate savings

Factors that Influence Pricing Strateg Cost Behavior over time 10000

Cost

20000

40000

100

1000

Prod rate

Distinction • Learning curve SRAC LRAC LC Decrease and Decrease and Decrease then then Increase Increase FC- Spread Worker waiting. Machine down time

Diseconomies How to do better Too many worker Develop skill Lack of control organize

Factors that Influence Pricing Strateg

tso C

Thumb rule :15% down for double

Increased Qty

Factors that Influence Pricing Strateg SRAC

tso C

Join the points to get LRAC

Production rate

Advantages of LC • Theoretically price will speed up market growth as well as discourage some potential competitors • He has been doing this for years – we should be careful • Higher profit – Price war • Prisoners dilemma is over

Pricing Strategies • New Product Introduction • • • • • • •

Market skimming Market penetration Cost plus PLC linked Flexible pricing strategy Leadership strategies New product at whose behestvery much pertinent

Pricing Policies • Discount pricing • Trade discounts - functional • Quantity discounts 10 upto 100, 9 beyond • Cash discounts 2 on 10 net 30 Geographical Pricing FOB origin Uniform delivered Zone Pricing Basing Point Pricing for profits?

Pricing Policies • Discount pricing • Trade discounts - functional • Quantity discounts 10 upto 100, 9 beyond • Cash discounts 2 on 10 net 30 Geographical Pricing FOB origin Uniform delivered Zone Pricing Basing Point Pricing for profits?