26-02-2024

B2B 5/e Chapter 13

Pricing for Business Markets

Learning Objectives
LO1: Understand the concept “Price a Function of Value”.
LO2: Analyze the factors influencing pricing decisions in business
markets.
LO3: Discuss different pricing methods.
LO4: Illustrate pricing strategies, policies and tactics.
LO5: Know the commercial terms and conditions relevant for business
markets.
LO6: Explain hire-purchase and leasing.

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Price : A Function of Value

• The overall perception of value varies in degree of importance to different
individuals within the buying center.
• Different individuals in the buying center have different perceptions of
value provided by various suppliers
• The benefits could be tangible and intangible and depend on the product
viz. capital goods, raw materials and components, core services and
solutions
• Supplier offering the lowest price may not necessarily be the lowest in the
total cost, if other costs and risks are considered.
• Business marketers should understand the various aspects of perceived
benefits and the total cost from the buyers’ point of view

Factors Influencing Pricing Decisions

• Pricing objectives
• Demand analysis
• Cost analysis
• Competitive analysis
• Government regulations.

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Factors Influencing Pricing Decisions

[Link] Objectives
• Derived from corporate and marketing objectives.
• Many alternative pricing objectives are available,
Examples :
 Survival
 Maximum short – term profits
 Maximum market share.
 Maximum market skimmi
 Meeting the competition
 Be regarded fair by customers
 Product – quality leadership

Factors Influencing Pricing Decisions

[Link] Analysis – Two aspects of demand analysis

I. Relationship between Demand and Price
• Demand schedule indicates price sensitivities of buyers
• If price elasticity of demand < 1, buyers are less price sensitive (inelastic
demand)
• If price elasticity of demand > 1, buyers are more price sensitive (elastic
demand)
• Many industrial products are relatively inelastic. Why ? Because the industrial
product
• Is customized or sophisticated
• Has a few competitors and no substitute product
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• Is a small percentage of total cost of the equipment

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Factors Influencing Pricing Decisions

[Link] Analysis – Two aspects of demand analysis
II. Cost Analysis
Classification of costs are needed for profitable pricing decisions
Understanding of the following concepts, for effective decision
making:
• Economies of scale
• Learning/experience curve
• Break-even analysis

Factors Influencing Pricing Decisions

[Link] Analysis
 Classification of costs is a pre-requisite for profitable pricing decisions
 Understand the following concepts, for effective decision making:
• Economies of scale
• Learning/experience curve
• Break-even analysis

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Factors Influencing Pricing Decisions

[Link] Analysis
 Collect competitor’s information regarding
• Price, discount, payment terms, costs
• Product and service quality, benefits offered
 Before initiating a price change, study major competitors’
• Financial situation, production capacity, sales
• Corporate objectives, strengths and weaknesses
• Culture, past – practices, mind-set

Factors Influencing Pricing Decisions

[Link] analysis
 Before responding to a price change initiated by competitor, the marketer
should study and respond to the following :
• Why has the competitor reduced the price?
• Is the price reduction temporary or permanent?
• What will be the impact of the price reduction on the company’s sales and profits
• What would be the reaction of other competitors?
• Customers generally welcome price reductions and resist price increases

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Factors Influencing Pricing Decisions

[Link] Regulations
Government regulations affect pricing decisions
Examples:
• Price cartel/price-fixing
• Price discrimination
• Predatory pricing
Government’s role is to ensure fair play and to protect
consumers & small companies

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Pricing Methods

There are four methods:

• Cost-based pricing

• Value - based pricing

• Competition-based pricing

• Transfer pricing

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Pricing Methods
Cost based pricing
[Link] variable cost per unit
[Link] a portion of fixed costs
[Link] the supplier’s markup or target profit(assuming certain minimum
volume of sales)

Pricing Methods
Value based pricing
• Price is set based on customer’s perception of value
• Perception of customer is based on:
 Expected performance of the product
 Quality
 Warranty/Guarantee
 Technical support
 Supplier’s reputation

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Pricing Methods
Competition based
 Setting the prices in relation to competitors’ prices
Transfer pricing
 The price at which divisions of a company transact with each other
 Transfer price is used for accounting purposes when different SBUs of a multi-
division company are responsible for their own profits
 Regulations enforce an arm’s length transaction rule that states that companies
must establish pricing based on similar transactions done between unrelated
parties.

Pricing Strategies, Policies and Tactics

Pricing strategies relevant to specific product-market
situations are:
[Link] bidding and negotiation
[Link] of new products
[Link] across the product-life cycle
[Link] strategies for hybrid- solutions

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Pricing Strategies : Competitive Bidding & Negotiation

Strategy adopted by purchasing departments of government and

commercial organizations
• In closed (or sealed) bidding, government buyers invite sealed bids from
potential suppliers through tender notices
• Negotiated pricing, a strategy adopted by commercial organizations, is
similar to open bidding(Negotiation of commercial and technical
aspects of the offers with the bidders before finalizing the order)

Pricing Strategies :Pricing of New Products

Two strategies commonly followed are

Skimming strategy
• High initial price for high-tech, distinctive, capital intensive new
products
• Later, reduce price to enter other segments
Penetration strategy
• Low initial price for new products with low-entry barriers for
competitors
• Resorted to when customers are highly price sensitive

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Pricing Strategies :Pricing across Product Life Cycle

Introduction stage
• As discussed earlier in pricing of new products
Growth stage
• Pressure to lower the prices from customers, due to entry of more
players
Maturity stage
• Lower prices to match aggressive competition
Decline stage
• Hold the price, if quality is superior
• Reduce the price, if sales volume has to be increased
• Selective price increase, if competitors withdraw from market

Pricing Strategies :Pricing of Hybrid Solutions

• Traditional pricing strategies may not be effective for solutions marketing
• Solutions require special capabilities and knowledge, for which costs cannot
easily be determined.
• Dynamic pricing resorted to by B2C services can be adapted by B2B solution
marketers to improve revenues and profitability.
For dynamic pricing strategy to be successful
(a)Managers should shed cognitive, status-quo, familiarity and heuristic biases
(b)Price should be decided prior to the execution of the project , based on accurate estimates of
value accrued to customers and the cost of execution, by effective deployment of analytics.
(c)Opportunities for price revisions based on the product-market dynamics and changes in
customer’s value perceptions should be made use of.

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Flexible Pricing Strategy

Adjusting the prices or profitability for certain products and services,
when market conditions change
Need for flexible pricing
 Firms that follow target-return pricing lose their market share to
aggressive competitors that adopt flexible pricing
 When a firm is faced with unused production capacity, less demand,
high fixed costs, and intense competition, to maintain market share
flexible pricing strategy has to be adopted.

Auctions and Reverse Auctions

English Auction
• Involves one seller and many buyers
• Item sold to the highest price bidder
Dutch Auction/Reverse Auction
• Involves one buyer and many suppliers
• Order goes to the lowest price bidder
Internet Auctions
• Large firms develop in-house auction sites
• Independent B2B auction sites like eBay & [Link] also facilitate auctions

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Pricing Policies
Pricing policies facilitate adjustment of base price (or list price) of a
product for different customer types, buying quantities, and locations
for remaining competitive.
Key Terms in Pricing Policies
• List price
• Trade discount
• Quantity discount
• Cash discount
• Geographic pricing

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Pricing Policies
List Price
• It is the base/basic price of a product set by a company
• List-price or price-list includes basic prices of standard sizes or specifications of a
product offered by the company
• Price – list statements, prepared by a manufacturer are made available to
intermediaries and customers
• Net Price = List price less discount
Trade Discount (TD)
• Offered to channel partners(i.e. dealers / distributors)
• Amount of TD: Based on industry norms and cost of functions performed
• Should preferably be be uniform to dealers/distributors

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Pricing Policies
Quantity/Volume Discount (QD/VD)
• Purpose: Encourage customers to buy large quantities
• QD /VD is justified as the firm’s costs are reduced if volumes are high
• Granted for total or incremental quantity purchased
• Given to all types of customers on price-list
• Quantum of QD/VD is based on demand, cost and competition
Cash Discount (CD)
• Purpose: Encourage credit customers to pay early
• Applicable on gross amount of the bill/invoice
• Better to pay by a credit note/cheque
• Quantum of CD depends on the prevailing prime lending rate of commercial
banks
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Pricing Policies
Geographical Pricing
Purpose: How to price different customers in different geographical locations
Two alternative methods used:
 Ex-factory
• Prices at the manufacturer’s factory gate, i.e. freight charges are to buyer’s
account
• Prices vary based on customers’ geographical locations
 F.O.R. / F.O.B. Destination
• Free on road/free on board up to destination, i.e. seller’s price includes freight
charges
• Same price-list applicable to all customers, irrespective of their different
geographical locations
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Hire-purchase and Leasing

Leasing is an alternative to direct purchase, mainly for
capital items
Buyers carry out cost/benefit analysis of Buying Vs Leasing
What is a lease?
• It is a contract through which the asset owner (called lessor)
extends the right to use the asset to another party (called
lessee) in return for payment of rent at agreed intervals
over a specified period
Benefits of leasing to a business customer:
• Conserving capital
• Gaining tax advantage
• Getting the latest product 27

Leasing: Operational Arrangements

A business marketing firm can make leasing arrangements for capital
equipment in three different ways:
(1) The firm can lease directly to the business customer by working out
lease and financing arrangements itself
(2) The firm can arrange leasing through other large organizations who
form credit subsidiaries to provide leasing to business buyers
(3) The firm arranges leasing to its business customers through a bank
or financial institution who is involved in leasing industrial equipment

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Type of Leases
Financial lease
• Non–cancellable, long-term agreements/contracts
• Fully amortized. Operating / maintenance costs to
lessee
• Option of purchasing asset to lessee, after expiry of
contract period

Operating lease
• Not fully amortized. Short-term agreements. Operating
/ maintenance costs to lessor. Lease rates higher than
financial lease rates.
• Purchasing option to lessee not included
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Pricing Strategy in Leasing

Decide lease rate to favor leasing
Decide lease rate to favor purchase
Achieve balance between lease rate and sale rate

End of PPt

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