Pricing is an indispensable part of Industrial marketing strategy.
For two reasons, price must be viewed as a part of the product oering as well as a separate element in the marketing mix.
First, from the buying rms perspective, it is the cost that must be weighed against product !uality, delivery, and supplier service.
"econd, from the sellers point of view, the price charged determines the protability of the product and provides the margins necessary to support other aspects of product oering, such as post purchase service and technical assistance.
#o #o the industr industrial ial buyer, price price is only one determina determinant nt of the economic economic impact that the product will have on the rm. $uyers are concerned with the %evaluated& price of a product, i.e. #otal cost of owning and using the product. "uch costs include, in addition to the sellers price, transportation transportation charges, the cost of installing i nstalling capital e!uipment, inventory carrying costs for parts and materials, order processing costs, and less apparent costs such as production interruption caused by between product failure, late delivery, or poorand technical support. #his distinction cost and price is important should not be overlooked by the industrial marketer. Factors Inuencing Pricing Strategies
'( )ustomer *emand +( ature of *erived *emand -( )ompetition ( )ost and Prot relationships /( 0arkets reaction to and perception of price 1( 2overnment 3egulations Customer Demand
Industrial market is diverse and complex. 4 single product may be used in many dierent applications and have varying usage levels across individual rms and market segments. #he importance importance of the product product to buyers buyers end products products may also vary. For For these reasons, potential demand, sensitivity to price, and potential protability dier across market segments. In setting price to in5uence demand, therefore industrial marketers must understand how products are used, recogni6e the potential customer benets, examine the cost of owning and using the products, and determine product values from the customers perspectives.
Thus the three things should be taken into consideration : 77 4naly6ing )ustomer benets
*emand analysis seeks to analy6e customers perception of values, the relative importance of price when customer makes purchase decision, the si6e of the market and dierent price levels. (Source : Morris and Calantone, 1990)
8ne such research research shows that a high price tends to limit the potential market for the product, while a low price tends to expand the market. In a competitive market, the principle forces that determine price charged and the !uantity produced and sold are contained in the prevailing conditions of supply and demand. #he less competitive the market, the less the interaction of supply and demand. 9Source : Dodge and Hanna, 1995) The Nature of Deried Demand
*erived demand means that sales to an 8riginal :!uipment 0anufactur 0anufacturer er 98:0( ultimately depend on the level of customer demand for products that the 8:0 makes.
#otal #otal !uantity demanded by the 8:0 for for component component parts, raw raw materials, materials, capital e!uipment and ancillary services will increase increase only as a result of increased purchases by end;product users.
$ecause of the relatively relatively distant relationship relationship between an industrial supplier and an ultimate consumer, what was a direct relationship between price and !uantity demanded in the consumer market becomes an indirect and often reversed relationship. Competition
0any industry marketers regard competitive level pricing as the most important pricing strategy. strategy. 4n industrial industri al rm should get the information on not only the competitors prices and cost but also about the competitors product !uality, technical expertise and delivery competitors performance.
#he information information on competitors competitors can be obtained obtained in several several ways. #he rms sales people and dealers can ask the buyers about the !uality, prices, services and delivery performance performance of the competitors during their sales call. "ometimes rms send their people posing as buyers to competitors rms to obtain competitors information either directly or as percieved by the buyers. #he company can buy competitors product and take it apart to estimate the cost of production.
8nce the industrial rm gets the information about the competitors product, it can use price to position its product vis;<;vis competitors.
#his means that that if a rms rms product product !uality is superior superior to all all its competitors competitors and its services 9including delivery, after;sales after;sales etc.( is e!ually good, it can price its product higher than the competitors.
=owever if the rms product and services are similar to the competitors then its price should be similar to that of ma>or competitors competitors prices.9if it decides to price its product higher it would lose its sales(
Cost and Pro!t "elationships
)osts set the lower limits of a product.
)osts varies over time and 5uctuate with volume.
)osts must be considered in relation to demand, competition and the market share ob>ectives of the rm.
0arketing, production and distribution costs are all relevant to the pricing decision.
?arious elements of cost like xed , variable, direct, indirect, etc react dierently to changes in the production !uantity.
#herefore a marketing #herefore marketing manager manager should determine determine which costs are are volume dependent, which products or markets generate the costs, and where opportunities for additional prots might exist. Market#s reaction to and perception of price
4 rm must know what customers want in terms of product performance
4s well as the price they are willing to pay, before it begins the physical development of the product.
In this way a rm becomes able to decide the upper limit l imit price of its product, resulting in more protable sale.
0any industrial products fail >ust because of the wrong market perception of price.
#herefore the marketing #herefore marketing department department should rightly rightly specify price; price; performance relationships as per the value perceptions of customers. $oernment "egulations
$usiness marketers must be aware of the eect of 2overnment regulations on pricing decisions. #hough we have a %free market economy&, there are some necessary restrictions that must be placed on business to ensure fair play, and to protect consumers and smaller companies.
For instance %price;xing& or %price cartels & are illegal, as per %0onopolies and restricted #rade Practices& 903#P 4ct(.
In a real world example, the @" *ept. of Austice ned several companies and individuals, including some ):8s.
Cost %ehaior oer time & The 'earning Cure
4lso known as experience curve B $)2 in 'CD+
First recogni6ed by $oeing in 'C/Es
#hey saw that that no of hrs needed to build an aircraft aircraft decreased decreased by abt +E +E each time the cumulative production doubled $)2 found similar results in other industries as well (e) Instructions *ith 'earning Cure
It is volume dependant, not time dependant ;
which means means as as a product product line mature matures, s, it takes takes longe longerr to reali6e reali6e any given percentage of cost reduction In simple words, it takes longer to achieve the 'E, '/ or +E reduction in cost )ost savings are not limited to the production process ;
0anager 0anagerial ial decision decision making, making, product product and process process designs designs and and good good distributive systems can all become more cost eective.
#he G;) concept is not the same as %economies of scale&
9:8" Brefers to relative production eHciency at di !uantity levels at any given point of time( ; it deals deals with accumulat accumulation ion of !uantity !uantity ove overr time time and is indep independe endent nt of the rate of production.
Strategic +se of '&C Penetration Strateg) B 4n industrial rm, aiming for a dominant position in a new product market segment will adopt an aggressive pricing pricin g strategy strateg y. "o the price will speed up market growth as well as discourage potential competition ,ther uses of '&C )overs sunk costs eectively :nhances mktng eorts *evelop new mkt opportunities Increases 3n* expenditures 3aises needed working capital :xpands production capacity
-.ects on Pricing anal)sis /Pg 012 34Imp45
Competitie %idding "ignicant amounts are purchased through )ompetitive $idding in I0s #his system is used as a means of exploring and determining determining price levels when purchasing non standardi6ed, complex products on which manufacturing methods may vary. 0a>orly those items that do not have an established market price. )ompetitive $idding can be closed6open For Formal mal invitation to potential suppliers, submitted in sealed bids 4t a decided time, all bids are opened and reviewed. ,pen %ids are more informal where one may write or say orally. )ostly, time consuming "ometimes contracts are given to the %lowest responsible bidder& #his means that that award is based on the suppliers promise promise and ability to
deliver, past experience and nancial capabilities.with the bidder and his technical, managerial 7uestions if there is a price B cut by a competitor, what strategies should be used to manage these price cuts