By Sanath Dasanayaka

In industrial marketing, the total cost to the buying firm includes not
only the price of the product but also following costs;

Transportation(freight) cost, transit insurance cost and installation cost(for
certain equipment and machinery).

In addition to the above costs, the buying firm considers the risk of product
failure, the delay in delivery, the lack of technical support or services.
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1. Pricing objectives
2. Demand analysis
3. Cost analysis
4. Competitive analysis

1. Pricing objectives; Below pricing objectives are reviewed before deciding upon
pricing strategies.

Survival: this is used when the organization is underutilizing its production
capacity to a large extent or the firm has a large unsold stock of products at its
stores or there is an intense level of competition in the market place.





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Here, the firm decreases product prices in order to sustain in the market. In this
way, they can cover variable cost and a part of fixed cost.

Maximum short-term profits: In this case, a firm attempts to maximize its
short-term profits. Companies following this objective select the price that
yields the maximum current profits. Those organizations usually do not
consider of legal implications and long-term customer relationships.

Maximum short-term sales: Focuses upon maximizing short-term revenue.
Through this, companies expect to acquire growth and market share.

Market penetration: Firms fix prices as low as possible with the aim of
getting a high sales volume and market share.


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Maximum market skimming: A firm sets a very high price in the introduction
phase of a new or innovative product aiming the market segments which are
least price sensitive.

Product quality leadership: In this, the aim is to produce superior quality
products more than rivals.

2. Demand Analysis; the purpose of demand analysis is to find out to what extent the
demand for a product changes with the changes in prices. In this, the price sensitivity
of different customers is identified and pricing strategies are designed depending
upon the elasticity of demand.


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There are two types of elasticity of demand;
I nelastic: Small change in demand relatively to the change in the price of the
product.

Elastic: Demand changes substantially with a small change in the products
price.


The demand is less elastic when there are few rivals; there is an unavailability
of substitute goods and when purchasers think high prices are justified due to
changes in government policies upon duty and taxes.

The demand for most industrial products is inelastic since their technically
sophisticated, customized and significant for customers operations in their
factories.





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When developing a successful pricing strategy a firm should consider its
products costs that are incurred by customers and benefits received in the
customers point of view.
There are two types of benefits;
Hard benefits: (benefits related to the products physical attributes, such as
production rate of a machine, price/performance ratio and rejection rate of a
component).

Soft benefits: (company reputation, customer service warranty period and
customer training).

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3. Cost Analysis; a firm should consider about costs incurred in production.
Types of production costs;
fixed costs: costs that do not change with the production or sales, such as rent,
interest charges and managerial salaries.

variable costs: costs that change on the units of production like material and
labor costs.

Total cost: sum of fixed and variable costs at a given level of production.

Semi variable costs: costs that vary with changes in output but not in direct
proportion to quantities produced. Ex. Equipment repair and maintenance
costs.


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Direct costs: fixed or variable costs that are incurred directly for a specific
product of sales territory. Ex. Selling expenses and freight.

I ndirect costs: fixed or variable costs that can be traced indirectly to sales
territory of a product. Ex. Production overhead and quality control costs.

Allocated/general costs: costs that support number of business activities but
cannot be objectively assigned to a specific product or market. Allocated across
business groups or divisions. Ex. Administrative overhead and corporate
advertising.

Economies of scale: the total average cost per unit decreases when the production
volume increases. The logic behind this is the total average cost per unit reduces
since the total fixed costs spread over more units.




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The experience curve: the average unit total cost of products decreases over a
period of time with the firms experience of manufacturing and marketing.

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4. Competitive Analysis: industrial manufacturers gather information on
competitors prices, costs, product quality, delivery performance and technical
expertise.
Ways of collecting information;
Asking the competitors customers about product quality, prices, services and
delivery performance.

Firms send their people as buyers to collect information through obtaining
quotations and product leaflets.

Conducting marketing research on competitors.

By using collected information on competitors, a firm can design its pricing policy
successfully.

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Example, if a firms products equal to competitors products in quality and
delivery performance, the company is able to charge a superior price as
competitors do.


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Pricing strategies in following situations are discussed.

1. Competitive bidding in competitive markets.
2. Pricing new products.
3. Pricing throughout the product life cycle.

1. Competitive Bidding: many government undertakings, such as Sri Lanka
Transportation Board, Ceylon Electricity Board and private and public
companies do their business in competitive bidding.
There are two types of bids;
closed/sealed bidding.
open bidding.
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Strategies for Competitive Bidding: One strategy is probabilistic bidding
strategy which has two assumptions; the pricing objective is profit
maximization and the buying organization will put the order on the lowest
price bidder.

There are three variables in this strategy- amount or price of the bid, expected
profit if the bid is expected and probability of acceptance of bid price. An
industrial marketer attempts to find out the optimum trade-off between the bid
price and the profit as well as the probability of winning the contract.



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The basic equation is displayed below;

E (A) =P (A)*T (A)
Where,
A = Bid price
E (A) =Expected profit at bid price A.
P (A) =Probability of acceptance of the bid price.
T (A) =Profit if the bid price A is accepted.

Ability to estimate P (A) depends upon the industrial marketers
knowledge of competitors costs, strengths, weakness and mind-set.

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2. Pricing New Products:

Skimming strategy : This strategy is utilized for distinctive new products for
which customers are not sensitive to initial high prices. In this, the firm has the
capability of recovering its investment in product development by generating
high profits. appropriate for products that are distinct, technology focused or
capital intensive-the factors creating entry barriers to rivals.

Penetration strategy: This strategy is commonly used when price elasticity of
demand is high or buyers are highly price sensitive, strong threats from
potential customers and opportunities to decrease the unit cost of production
and distribution with increase in production volume.





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3. Pricing across Product Life Cycle

Growth Stage Pricing Strategy : In growth stage, more new customers enter
into the market began buying the firms products. Here, industrial marketers
lower the product price as well as they focus on product differentiation, product
line extension and building new market segments.

Maturity Stage Pricing Strategy : Here, competitors are aggressive in the
market. In this, a company has to cut its competitors market share to increase
its sales. The strategy is to lower prices to match the competitors prices.

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Decline Stage Pricing Strategies: There are three strategies.
-If the company has a reputation on good product quality or dependable service,
do not cut price but reduce costs to earn some profits.
-cutting prices to increase sales and using a product to help to sell other product.
-Selective increases in prices in markets that are not price sensitive.


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1. List Price: It is a base price of a product consisting various sizes and
specifications. This is a published statement of basic prices and given to the
customers. This statement implies the effective date of its applicability and shows the
extra charges for optional product features, and discounts.

2. Trade Discounts: Trade discounts are offered to marketing intermediaries, such as
dealers and distributors. The amount of trade discount given depends upon the
particular industry norms and the functions performed by those intermediaries.
Further these trade discounts should be uniform to all industrial intermediaries.

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3. Quantity Discounts: A quantity or volume discount is given to customers who
buy in large quantities as well as this is a price reduction given by deducting the
quantity discount from the list price of the product. These discounts can be given
either on individual orders (non-cumulative basis) or on a series of orders over a
longer period of time, usually one year (cumulative basis). The purpose of this is to
encourage customers to buy in larger quantities and maintain customer loyalty. The
amount of quantity discounts depends on demand, costs and competition.


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4. Cash Discounts: cash discounts are given to encourage customers for prompt
payments. This is applicable on gross amount (basic price plus excise duty plus sales
tax) of the bill and this is granted to customers who pay bills within a stated period
from the date of invoice.

5. Geographical Pricing: Pricing the companys products based upon the different
geographical locations of buyers. Mainly, this happens since the company has to
undergo different transportation costs and transit insurance when delivering products
to various locations. Here, there are two methods in geographical pricing.

Ex-Factory: here, transportation costs and transit insurance costs should be
incurred by the buyer. ex-factory means the prices prevailing at factory gate.
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FOR Destination or FOB Destination: this means free on road/free on board
destination. In this transportation (freight) costs are absorbed by the seller or
include in the quoted price. Although the small transit insurance costs are
absorbed by the seller, commonly, average transportation costs and transit
insurance costs are included to the basic product price. In this method, all
customers get the product at the same price irrespective of their location from
the sellers factory premises. However, in the intense competition sellers can
the whole transportation and transit insurance costs.


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D.M. Sanath Dasanayaka.
University of Sabaragamuwa, Sri Lanka.
June, 2014.
(e-mail: sanath.dasanayaka@yahoo.com)






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