B2B Pricing

Pricing Strategies
Definition:
Price is the amount that an organization charges for a product or service
• It is the result of a complex set of calculations, research and
understanding and risk taking ability.
• A pricing strategy takes into account segments, ability to pay, market
conditions, competitor actions, trade margins and input costs,
amongst others.
• It is targeted at the defined customers and against competitors.
Types of Pricing
• Premium pricing: High Price. Such pricing strategies work in segments and industries
where a strong competitive advantage exists for the company. Example: Porche in
cars and Gillette in blades.
• Penetration pricing: Price is set artificially low to gain market share quickly. This is
done when a new product is being launched. It is understood that prices will be
raised once the promotion period is over and market share objectives are achieved.
Example: Mobile phone rates in India; housing loans etc.
• Economy pricing: No-frills price. Margins are wafer thin; overheads like marketing
and advertising costs are very low. Targets the mass market and high market share.
Example: Consumer products
• Skimming strategy: High price is charged for a product till such time as competitors
allow after which prices can be dropped. The idea is to recover maximum money
before the product or segment attracts more competitors who will lower profits for
all concerned. Example: the earliest prices for mobile phones, VCRs and other
electronic items where a few players ruled attracted lower cost Asian players.
Factors Influencing Pricing
1. Pricing Objective - Derived from Corporate and Marketing Objectives
• Survival – covering variable costs and some fixed cost to keep the
business running – lower price
• Maximum short term profits – estimate market demand & costs –
higher price
• Maximum Market Share – Maximise volume and market share -
lower price – Market Penetration Strategy
• Maximum Market Skimming – demand is less sensitive to price –
maximize revenue and profits – innovative products
• Product Quality Leadership – Superior product, higher pricing
Factors Influencing Pricing
Price Elasticity of Demand
• Price elasticity of demand =
Percentage change in quantity demanded
_________________________________
Percentage change in price

Price Less elastic

• Few competitors
• No substitute products
• Higher price is justified
• Changes in regulation
Factors Influencing Pricing
2. Cost Benefit Analysis
• Hard Benefits – Physical Product Attributes (Capital items – life cycle
costing – cost of goods, running costs, energy cost, maintenance cost
etc)
• Soft Benefits – Reputation, Customer Service, Warranty etc ( difficult
to assess
Important to understand customer perception benefits with cost to do
the trade-off during negotiation
Factors Influencing Pricing
3. Cost Analysis
• Sum of Fixed and Variable costs
• Fluctuating costs based on volume
• Semi variable costs - repairs
• Indirect costs – overhead costs
• Allied or General costs - Administrative costs, Finance costs etc
• Include product, marketing and distribution costs
• Costs at differing production levels
• Economies of scale (correct demand estimation)
• Optimum costs – sometimes volume is higher cost too
Factors Influencing Pricing
Break Even Analysis
• Different prices and possible effects on sales volumes and profits
• Break even volume = Fixed Costs
--------------------------------------------------------
Selling Price – Variable Costs
Factors Influencing Pricing
4. Competitive Analysis
• Price and costs of competitors
• Product Quality, Technical Expertise, Delivery Performance, Service
• From where – sales people, dealers, customers, internet, press, trade
shows, ads etc
• Product analysis by R&D

Ensures right pricing relative to competition – based on product

Factors Influencing Pricing
Competitors Response to Price changes
• Study major competitors finances, production capacity, actual sales, costs, corporate objectives,
strengths and weaknesses
• Study mindset – business philosophy, culture, past practices
• Anticipate reaction to price changes
• No reaction
• Selective reaction
• Strong reaction
• Unpredictable
• If competition changes price - Questions to be asked
• Why price change
• Temporary or permanent
• Impact on sales and profits
• Reaction of other competitors
Factors Influencing Pricing
5. Government Regulations
• MRTP and Competition Act ( 2003)
• Price Discrimination – same discount structure to intermediaries
• Predatory Pricing – wipe out competition because of resource
availability
Pricing Methods
1. Cost Based Pricing
• Estimate Variable cost per unit
• Allocate the portion of fixed cost
• Add supplier mark-up/Target Profit ( assume quantity)
Example: Construction Companies/ Services like lawyers, auditors etc
Advantages
• Transparency
• Cost is easier to estimate than demand
• Price competition is minimized
Disadvantages
• Ignores current demand, perceived value and competition – hence not optimal
• Lack of supplier cost knowledge/estimation
• Fixed costs shared by multiple products
• Based on expected sales volume
Pricing Methods
2. Value Based Pricing
• Price is set as per customers perceptions of the product – whats the
value proposition
• Communication elements like ads, events, internet etc used by teams
to increase perception
• Impression of product, performance, quality, service, reputation etc –
with diffent weightages
3 types - Price buyers, value buyers, loyal buyers
Understand decision making process and value drivers target segments
and customers and offered varied value proposition
Pricing Methods
3. Competition based Pricing
Setting price based on competitors pricing
Based on product offering – quality, delivery, service etc

Highest market share supplier – has price leadership

Competition bidding, price negotiation, discounts and rebates are

common practices
B2B Pricing Strategies
B2B pricing is the process of setting prices on goods or services with the
intent of marketing and selling them to other businesses, and not directly to
consumers.
Three common B2B pricing strategies are
• Value-Based Pricing,
• Cost-Plus Pricing, and
• Competitor-Based pricing.

• The most powerful B2B pricing strategy is Value-Based Pricing, as it forces

you to look outward at your customers to form the perfect pricing
strategy for your B2B business.
B2B Pricing Strategies
Overall a great B2B pricing strategy should be:
• Always evaluating its pricing
• Always testing its pricing
• Using personas for pricing
• Using the correct value metrics
• Basing price tiers off of pricing personas
• Listening to customers
Pricing Strategy
Mistake #1: Using a “set it and forget it” pricing strategy
• Developing a great product and increasing market awareness is
undoubtedly important, but nothing impacts customer purchasing
decisions more, and no other area of your business can be changed
and produce positive results as fast as pricing.
• Pricing cannot be treated as an afterthought, but instead as a core
competency of your business. Pricing needs to continuously tested
and evaluated to determine the proper mix of packages and prices
that appeal to customers.
Pricing Strategy
Mistake #2: Not experimenting with your pricing
• Constantly testing and evaluating your pricing strategy is important.
This can help your business understand the optimal mix of product
features and prices that appeal to your customers, allowing you to
optimize.
• A company must evaluate multiple pricing options before settling on a
final strategy that combines the best aspects of each tested option.
Pricing Strategy
Mistake #3: Having incomplete persona analyses
• Some companies assign pricing tiers to the buyer personas. However
this is an incomplete picture of who potential customers are, what
they want, and, most importantly, what they’re willing to pay.
• Buying personas need to take into consideration feature preferences
and willingness to pay. This product-specific information will allow
development of multiple, feature differentiated pricing tiers
What’s a buyer persona
• Buyer personas, developed using real answers from real buyers (and
validated by through research), are used to help business owners
navigate the landscape of their ideal customer.
• These fictional characters are not merely a description of your buyer,
but rather they are a collection of valuable insights into your buyers
that you can use to help get to know your audience, improve your
marketing strategies and create better content.
B2C Buyer Persona
B2B Buyer Persona
With B2B personas, the target is either the decision makers themselves or those who influence decision makers. This
person may or may not be spending their own money and may or may not have to answer to others.
Pricing Strategy
Mistake #4: Charging based on the wrong criteria
• The best value metrics ensure that customers paying for a product is
according to the benefits they receive from it.
For example, most CRM providers such as Salesforce charge along the value
metric of users—the customer pays more as the amount of users increases.
Theoretically, an increase in Salesforce users should translate to an increase
in revenue for the customer. This benefit of increased revenue is what
justifies Salesforce charging for each additional user.
• Make sure you’re pricing based on the value metrics that your
customers truly care about and that make sense to them.
Pricing Strategy
• Mistake #5: Providing too many (or too few) pricing options
• Some businesses make the mistake of providing too many pricing tiers,
while others make the mistake of providing too few. The correct amount of
pricing tiers for your business will align with unique buyer personas.
• Charging one price for a product is almost always inadvisable as it leaves no
room for customers to upgrade and captures revenue at only one point
along the demand curve.
• Having said that, a single price point is easier for potential buyers to
understand and makes the customer buying decision much easier.
• Ideally, you want one tier per pricing persona
Pricing Strategy
Mistake #6: Offering unnecessary discounts
• Discounting for renewal of contracts sets a bad precedent for
customers conditioning them to expect discounts, which is very
difficult to reverse.
• Improve customer satisfaction by providing excellent customer
support and listening to customers.
Product Life Cycle Pricing
Early-Stage Pricing
• In fact, the most important aspect of early-stage life cycle pricing is
not pricing the new product - it’s pricing the existing portfolio
products and optimize the context in which your new product's price
is set.
• The customer will compare the products and look at how much
additional value the new product offers, and then compare the two
price points.
• Important to create optimal context you can set a high price for the
new product that reflects the value the product provides to the
customer
Pricing New Products
• Skimming – high initial pricing strategy
• Product – distinct, high on technology, / capital intensive
• Market not sensitive to high price
• Can recover development expenses
• Then price reduction – to widen customer base
Pricing New Products
• Penetration Strategy
• High price elasticity of demand
• Strong threat from competition
• Opportunity to reduce unit costs based on volume
• Lower profit – higher volume game
Mid-Stage Pricing
• At this stage, competitors will notice the success of your product & launch
similar products, or reduce the prices of existing ones to compete on price.
• Systematic reduction of prices, will result in tighter margins, unnecessarily
increase price competition in the market, and essentially not gain any
market share. Discounts can be a good idea, however, they should be
based on market conditions.
• Market monitoring is a crucial component in mid-stage pricing so that
pricing decisions (typically discounts) are based on competitive behavior
and sales trends rather than a fixed price decrease.
• The mid-stage of the product’s life cycle is where companies generate the
majority of their profits, so fine-tuning pricing will greatly impact the
bottom line.
Growth and Maturity stage
Focus on
• Product differentiation
• Product extension
• Building new market segments

• Lowering price, faster availability, better service etc

Late-Stage Pricing
• Sales are declining and most customers have moved on to a newer version
of the product. However, those customers that remain will typically exhibit
very high loyalty and thus, have a higher willingness-to-pay.
• Customers know the product, and don’t want to take the challenges and
changes to be made to their own product that comes with a newer version.
• To avoid cannibalizing the product version next in line…it may make sense
to price the current product higher since ultimately the product will be
taken off the market…and prepare the framework for new product usage
Bidding, Negotiation,
Discounts etc
Competitive Bidding / Tendering
Transparent' procurement method in which bids from competing
contractors, suppliers, or vendors are invited by openly advertising the
scope, specifications, and terms and conditions of the proposed contract as
well as the criteria by which the bids will be evaluated.
• Competitive bidding aims at obtaining goods and services at the lowest
prices by stimulating competition, and by preventing favoritism.
(1) open competitive bidding (also called open bidding), the sealed bids are opened in
full view of all who may wish to witness the bid opening;
(2) closed competitive bidding (also called closed bidding), the sealed bids are opened
in presence only of authorized personnel.
Competitive Negotiations
• Tendering method (used as an alternative to competitive bidding) in
which a request for proposals (RFP) is sent only to qualified
contractors or suppliers.
• The RFP details the scope, specifications, and terms and conditions of
the proposed contract and the criteria for evaluating the bids.
• Then separate negotiations are carried out with each bidder whose
bid falls within the preset competitive range.
• The process concludes with the award of contract to the bidder who
offers most advantageous price, quality, and service combination.
Negotiation
At some point in everyone's life there is a time to negotiate: buying a
new car, asking for a raise, running your business or perhaps just
bartering for trade.
• Negotiation is a two way conversation that by definition is intended
to give both parties what they want through compromise and
concurrence.
• Skills in negotiation are highly coveted. The "pros" make it an art
form, while the rest of us might feel a little sick to our stomachs and
often settle for less than intended.
• To a certain degree there is a formula for success. A good negotiator
is roughly 10% personality and 90% preparation.
Tendering
• Tendering usually refers to the process whereby governments and
financial institutions invite bids for large projects that must be
submitted within a finite deadline.
• Procurement is often carried out by the process of tendering, rather
than buying products directly from a seller. A company or
organisation (the promoter, client or employer) wishing to obtain
goods or services will first specify its requirements. Subsequently, it
will open the bidding in a process known as tendering.
Tendering
• The underlying objectives of procurement and tendering are
concerned with ensuring competition, which is viewed as a key factor
in achieving the twin objectives of:
• accountability in the spending of public money; and
• transparency in the steps of the decision-making processes.
•
Pre tender
• Pre-bid meetings are usually held, if previously mentioned in the
solicitation documents, during the bid/proposal preparation period.
Their purpose is to clarify any concerns bidders may have with the
solicitation documents, scope of work and other details of the
requirement.
• These meetings are formal and the results are made available in
writing to all prospective bidders that registered interest in the
requirement, be it through requesting, buying or downloading the
solicitation documents from an official website.
Site visits
• Formal site visits are usually planned and carried out for works
procurement and more complex goods requirements
• Site visits, can and should preferable be held prior to the pre-bid meeting.
The reason for this preference is because after the site visit, bidders may
have additional queries and these can be addressed at the pre-bid meeting
and formally sent (with the minutes) to all prospective bidders
• Sometimes, as a result of the site visit/pre-bid meeting there might be a
need to extend the bid/proposal submission date by way of Addendum to
the solicitation documents to give bidders sufficient time to address any
changes made to the solicitation documents as a result of the site visit
and/or pre-bid meeting.
Reverse Bidding
What is a Reverse Auction? Reverse Bidding?
• A reverse auction is a type of auction in which sellers bid for the
prices at which they are willing to sell their goods and services.
• In a regular auction, a seller puts up an item and buyers place bids until the
close of the auction, at which time the item goes to the highest bidder

• In a reverse auction, the buyer puts up a request for a required good

or service. Sellers then place bids for the amount they are willing to
be paid for the good or service, and at the end of the auction the
seller with the lowest amount wins.
Understanding Reverse Auction
• Reverse auctions gained popularity with the emergence of internet-based
online auction tools that enabled multiple sellers to connect with a buyer
on a real-time basis.
• Today, reverse auctions are used by large corporations and government
entities as a competitive procurement method for raw materials, supplies
and services like accounting and customer service.

Example of a Reverse Auction

• Bidding for government contracts is an example of reverse auctions. In this
type of auction, governments specify requirements for the project and
bidders, who are approved contractors, to come up with a cost structure to
finish the project.
Caveats of a Reverse Auction
• A reverse auction works only when there are many sellers who offer
similar goods and services to ensure the integrity of a competitive
process.
• In addition, there could be the tendency to focus on the lowest bids
by sellers with less regard for quality of the good or services.
• A buyer must be thorough in communicating all the specifications to
the auction participants or else it may end up with a winning bid that
does not capture all of the sought-after attributes.
 Leasing
Connected to Make Decisions
Leasing
• A lease is a contractual arrangement calling for the lessee (user) to
pay the lessor (owner) for use of an asset.
• Property, buildings and vehicles are common assets that are leased.
Industrial or business equipment is also leased.
• A lease agreement is a contract between two parties, the lessor and
the lessee.
• The lessor is the legal owner of the asset; the lessee obtains the right to use
the asset in return for regular rental payments.
• The lessee also agrees to abide by various conditions regarding their use of
the property or equipment.
• For example, a person leasing a car may agree that the car will only be used
for personal use.
Leasing
• Leasing is also used as a form of financing to acquire equipment for
use and purchase.
• Many organizations and companies use lease financing for the
acquisition and use of many types of equipment, including
manufacturing and mining machinery, vessels and containers,
construction and off-road equipment, medical technology and
equipment, agricultural equipment, aircraft, rail cars and rolling stock,
trucks and transportation equipment, business, retail and office
equipment, IT equipment and software.
• Lease financing for equipment is generally provided by banks,
captives and independent finance companies.
Role of Leasing
• Leasing versus purchase – cash flow benefits exceed cash flow costs
• Conserving capital;
• Gaining tax advantage
• Getting latest products

• Types of Leases
• Financial leases – Non cancellable, long term and fully amortised
• Buyer pays operating and maintenance costs
• Option to by the asset at the end of the contract period
• Operating Leases - Cancellable, short term and not fully amortised
• No purchase option
• Higher costs – because operating and maintenance is of the marketeer
Elements attached to Leasing
• Time period: The term of the lease may be fixed, periodic or of
indefinite duration. If it is for a specified of time, the term ends
automatically when the period expires
• Responsibility and Usage
• Repair and Maintenance
• Payment terms – periodicity
• Deposit – security deposit, damage deposit etc
• Insurance – accidents, fire, theft, vandalism etc
• Calamities/ Natural Disasters
Contracts
• A contract is a legally binding agreement between two or more
parties in which an exchange of value is made. The contract's purpose
is to set out the terms of the agreement and provide a record of that
agreement which may be enforceable in a court of law.
Pricing Terms
Pricing Policies
• List Price
• Published statement of basic prices
• Extra charges – taxes and delivery extra
• Period of applicability
• Price of additional features
• Trade Discount
• Offered to intermediaries – eg 15%
• Quantity Discount
• Higher the volume, greater the discount
• Cash Discount
• Offered for prompt payment of bill within timeline – 2%
Geographical Pricing
• Ex-factory – prices at the suppliers gate
• For Destination – including transportation, insurance etc

• GST – done away with Octroi, Sales tax etc

Commercial Terms
Terms of Payment
• Direct Payment – given credit 15/30/45 days, goods and invoice come
together
• Payments through bank
• DP – Documents against payment
• DA – Documents on Acceptance
• LC – Letter of Credit
• Bank Guarantees
Contracts
Fixed Price Contracts
• These have a clear statement of work, and the buyer accepts a seller’s price for it. In this
type of contract, the seller bears the risk.
• Example: Purchase order: it will establish the price, quantity, and date for the deliverable. There
are three main types of fixed price contracts:
• Firm fixed price:
• The most common. A price is set from the outset and will not change unless there is a change in
scope.
• Fixed price with economic price adjustment:
• This is a type of fixed price contract and is used for contracts that span multiple years.
• Fixed price incentive fee:
• A ceiling price is established the maximum amount the buyer will pay.
• Then both parties agree upon a target cost (FP) and the target fee (IF).
• Both added together become the target price.
• Finally, each agrees to a share ratio of cost overruns or underruns. The share ratio then is used to
calculate the point of total assumption (PTA), where the buyer stops contributing to cost overruns
and all additional costs incurred come from the seller’s profit.
Example
Let’s assume I want to purchase a custom piece of equipment that a contractor will make.
• Target Cost – $100,000
• Target Profit – $10,000
• Target Price – $110,000 (target cost + target profit)
• Ceiling Price – $125,000
• Next, assume we agree to an 80/20 share ratio. Share Ratio – 80% buyer, 20% seller
• At some point, because I’m not paying any more than $125,000 total, the share ratio goes to 100% contractor
and 0% me. This is the PTA and is calculated like this:
• PTA – ((ceiling price – target price)/buyer’s share ratio) + target cost
• PTA = (($125,000- $110,000) / 0.8) + $100,000
• PTA = $18,750 + $100,000
• PTA = $118,750
• Therefore, once costs go above $118,750, the contractor incurs 100% of them. The contractor can
still make a profit (up until the cost reaches $125,000), but each additional cost eats into it.
• https://www.dudesolutions.com/blog/3-types-of-contracts-in-facilities-and-project-management
Cost-Reimbursable Contracts
These contacts first reimburse the seller for all actual costs incurred and then add a fee for the
seller’s profit. In this type of contract, the majority of the risk falls on the buyer and is less desirable
because of it. There are several types of cost-reimbursable contracts:
• Cost Plus Percentage of Cost (CPPC) – In this type of contract, the seller bears zero risk and the
buyer accepts it all. This is the least desirable cost-reimbursement contract for the buyer since all
costs incurred by the seller are reimbursed plus a percentage of them.
• Cost Plus Fixed Fee (CPFF) – Here, the buyer still bears all risk, but the seller’s profit does not
increase as costs increase. The profit is set at the beginning of the project (typically a percentage
of the estimated costs) and does not change unless the scope changes, regardless of seller’s
performance.
• Cost Plus Award Fee (CPAF) – This contract shares the risk a little more with the seller. In the
CPAF, the buyer reimburses the seller for the actual costs and then awards a fee based on the
buyer’s satisfaction of performance standards outlined in the contract.
• Cost Plus Incentive Fee (CPIF) – This contract shares the most risk between buyer and seller of
the cost-reimbursable contracts. In the CPIF, the buyer reimburses the seller for actual costs and
then pays an incentive fee that is predetermined and outlined in the contract based upon the
seller achieving certain objectives.
Time and Materials Contracts

• T&M (time and materials) contracts are a hybrid of both fixed price
and cost-reimbursable and are used when a clear statement of work
cannot be generated.
• An example of this is using set professional hourly rates (for instance
attorney fees) when the scope (number of hours the buyer will need)
is unclear. It is always a good idea to establish a ceiling or a not-to-
exceed (NTE) price in this type of contract to avoid massive cost
overruns.
Parties to procurement: The most commonly used engineering contracts recognise
a “triangle of actors’: promoter; engineer; and contractor.
• The promoter/client, otherwise known as the employer, specifies, authorises and
pays for the work to be undertaken.
• The engineer acts as an agent on behalf of the employer. The duties of the
Engineer include:
– evaluation of tenders;
– supervision of the work of the contractor;
– confirmation of whether or not the work
as been completed to specification; and
– mediation between the employer and the
contractor in case of dispute.
• The contractor (the bidder) successfully bids for a contract and carries out the
work required.
Procurement objectives
• A typical case involves an urban government letting a contract to a private sector
company for the construction of infrastructure improvements. The municipality is the
promoter; it has planned and designed the work, and is paying for it to be implemented.
The urban government promoter appoints an engineer, who is usually in the full-time
employment of the relevant government department. In accordance with the procedures
laid down, a private sector contractor is then appointed to do the actual construction
work.
• The engineer has the important role of ensuring that the interests of the promoter are
met, and that the contractor is duly paid for his/her efforts. The promoter wants the best
value for money and the contractor wants to secure a good profit; whilst this dichotomy
can involve an enormous range of complex and contentious issues, satisfying the various
interests often comes down to ensuring that a “triangle of objectives” are met:
• Cost: has the work been completed within the costs agreed in the contract?
• Quality: has the work been carried out in accordance with what was specified?
• Time: has the work been completed satisfactorily within the time specified?
• The traditionally accepted objectives of procurement procedures and contract
documents are to ensure that works are executed at the minimum cost that is
consistent with the need to achieve a product of acceptable quality within an
acceptable timeframe.
• Procurement procedures and contract documents do this by reducing
uncertainty, which in turn is done by:
• clearly defining who is liable to take any risk that cannot be eliminated from the project; and
• providing information on the work to be carried out so that all concerned are clear about
what has to be done and what their role is in doing it.
• The role of the engineers in urban government is to ensure that objectives
relating to cost, quality and time are achieved. The objective which is most
difficult to assess, and causes most concern, is the quality of the finished work.
The reality is that neither the engineers as supervisors nor the government as
promoters are primary stakeholders with a strong motivation for ensuring that
adequate work practices and standards are maintained.