INDUSTRIAL PRICING STRATEGIES

AND POLICIES

Understand the special meaning of price Know the factors that influence pricing decisions, i.e. price determinants

Understand pricing strategies for different product/market situations

Examine the pricing policies for various types of customers

Understand the role of leasing

INDUSTRIAL PRICING
Suggested Readings Industrial Marketing By Havaldar, Chapter 11 Tata McGraw Hill

SPECIAL MEANING OF PRICE

Some

business

customers

follow

Value-based

pricing

by

evaluating, suppliers offerings based on the concept of the suppliers offering equal to the difference between the perception of value (or benefits) and the cost to the buying firm. These are value buyers, and marketers should attempt to have value added relationship, if suppliers have purchasing orientations.

Perception of value in value-based pricing is made up of several

elements

like

customers reliable

perceptions warranty

of /

product after-sales

quality

performance, properties.

delivery,

service,

reputation of the supplier, etc which are enhanced and augmented

 Cost to the buying firm includes basic Price, freight, transit

insurance, installation, risks of product failure, delayed delivery, etc,

Some customers are price buyers, Marketers, should

follow transactional properties.

relationships

&

offer

basic

Some other buyers are loyal buyers, for whom marketers

should follow relationship marketing with partnering / collaborative approach and mutually acceptable prices.

FRAMEWORK OF PRICING DECISIONS

Before taking pricing decisions, a buying firm must find "price determinants". (i.e. factors that influence pricing decisions)

(i) Pricing objectives (ii) Customer analysis (iii) Cost analysis (iv) Competitors' analysis (v) Govt. regulation / policies

Two types of pricing decisions.

Pricing strategies

Pricing policies Discounts Geographical pricing

Setting a price (product / market situations)

Competitive/ Tender Bidding

New Product Across PLC

Initiating a price change

Responding to a competitor's price change

Leasing
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PRICE DETERMINANTS OR FACTORS

INFLUENCING PRICING DECISIONS
(i) Pricing objectives, (ii) customer analysis, (iii) cost
analysis, (iv) competitive analysis, (v) Govt. policies.

1. Pricing Objectives
Are derived from corporate and marketing objectives. Some of the pricing objectives are survival, maximum

short term profits, maximum short term sales,

maximum sales growth, product quality leadership, etc.

2. Customer (Demand) analysis

It includes demand analysis & cost - Benefit analysis (i) Demand analysis. Using experimental research, it measures relationship between price and demand (or sales volume). It sums up how sensitive customers are to the price changes. The formula is:
Price elasticity of demand (PED)
% change in quantity demanded = % Change in price

If PED is > 1, demand is elastic, & customers are price sensitive If PED is < 1, demand is inelastic, customers are less sensitive to prices.

(ii) Cost Benefit Analysis

Necessary to know target customers perceptions of benefits (or value)

and costs.
Benefits are categorized into hard (or tangible) benefits like quality,

production rate, performance, etc. and soft (or intangible) benefits like
customer service, company reputation, warranty period, etc.
Cost includes price, duties and taxes, freight, installation, maintenance.

3. Cost Analysis
A firms total cost of a product is the lowest point on the price range.

Hence, for pricing decisions, the marketer must know the various types of

costs like fixed, variable, total, direct, etc. for a product / service.
Costs vary based on production capacity (i.e. economies of scale), and

accumulated experience (i. e. learning curve) as shown.

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Cost per Unit

Economies of Scale

Quantity Produced per year

Cost per Unit

Experience / Learning Curve. Av. Cost Reduction = 10-30%

Accumulated Production
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Break - Even Analysis

is useful to consider different

prices (P1, P2, P3), and its effect on sales revenue and profits.

Sales & Costs

Sales Revenue at P3

Sales Revenue at P2 Sales Revenue at P1 Total Cost Fixed Cost

Sales Volume
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4. Analyzing Competition
Many marketers have competitive level Pricing as

a pricing objective.
Marketers

should get Competitors prices, discounts, costs, product quality, service, etc for cost/benefit analysis, pricing and positioning strategy.

Competitors information can be obtained from

various sources.

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5.Government Regulation/Policies Govt. regulations are necessary to ensure fair play

and to protect consumers and small scale suppliers.

Price-fixing / price cartels, price discrimination (e.g. different discounts to distributors/dealers), and predatory pricing (e.g. dominant firm aiming to finish competitors) are not permitted (illegal as per

MRTP act, for example)

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PRICING STRATEGIES
Pricing strategies vary as per product-market situations such as (i) Competitive bidding in competitive markets, (ii) New product pricing, (iii) Pricing across product life-cycle.

(i) Competitive Bidding

In business markets, large volume of purchasing is done through competitive bidding, using either closed (or sealed) bidding or open (or negotiated) bidding method.

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 In closed bidding, often used by the Govt. buyer,

sealed bids are invited through newspaper tender notices. Sealed bids are opened in presences of suppliers and orders are placed price bidder(s).
In open bidding, after receiving bids (quotations),

on the lowest

the buyer negotiates technical and commercial parts with suppliers, and then places orders. This

method

is

often

followed

by

commercial

enterprises in private sector .

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Strategy / Model Used for Competitive Bidding

One of the often used strategies is Probabilistic Bidding, which

makes two assumptions :

(i) Pricing objective is profit maximizations, (ii) Lowest price bidder will get the order

Equation used : E (A) = P (A) x T(A), where A=Bid price, E(A) = Expected profit at bid price A, P(A) = Probability of winning (or

getting order ) at the bid price A, T(A) = profit, if bid price A is

accepted.

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An Application (example) of probabilistic Bidding Strategy

Bid Price ( Rs) (A) 450 430 410 400 380 360 340 330 Total Cost Per Unit (Rs) (C) 350 350 350 350 350 350 350 350 Competitor's Last Tender Price (Rs) (B) 360 360 360 360 360 360 360 360
Probability For getting order At A Price = P (A)

Profit (Rs) T (A) = (A) - (C) 100 80 60 50 30 10 (10) (20)

Expected Profit (Rs) E (A) = P (A) X T (A)

0.00 0.15 0.40 0.50 0.72 0.90 0.95 1.00

0 12.00 24.00 25.00 21.60 09.00 (9.50) (20.00)

Rs.60 corers tender from Dept. of Telecomm. (DOT) for underground cable jointing kits. The company ghosted Rs.400/- per kit (expected maximum profit). Tender opening revealed, it was L4.L1 was Rs. 330/-, L2=350, L3=Rs 380/- The company estimates of B and P(A) were incorrect.
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(ii) New Product Pricing Strategy

In the introduction stage of a new product, two alternative pricing (i) Skimming strategies (high initial are price) available strategy, and

(ii) Penetration (low initial price) strategy.

Skimming Strategy is appropriate for a new product that is distinct, hightech, or capital intensive, and purchased by a market segment that is not sensitive to the initial high price. The advantage is faster recovery of investment by generating larger profits. The disadvantage is that it attracts competitors due to high profits. The firm reduces prices after some time to reach other segments.
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Penetration strategy is appropriate when (i) buyers are highly price sensitive, (ii) strong threat exists from potential competitors (due to low entry barrier). The selling firms objective is to achieve long term profits through

high market share. The firm can also achieve cost

leadership thru economies of scale and experience curve, which gives competitive advantage.

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(iii) Pricing Across Product Life Cycle (PLC) Marketing and pricing strategies vary as the product moves across 4 stages of PLC. (a) Introduction stage: We have discussed pricing strategy in this stage earlier in pricing a new product. (b) Growth stage: The firm lowers the prices to attract the next layer of price sensitive buyers. Also more suppliers

enter the market and buying firms put pressure on the

existing suppliers to lower prices.

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(c) Maturity stage: The firm may cut the prices to match aggressive competitors prices by giving volume discounts, absorbing freight costs, or more credit. If industrial customers do cost - benefit analysis, a selling firm may increase prices or not make any change in prices due to its superior product quality.
(d) Decline stage: Pricing strategy varies depending on conditions. (i) If buyers perceptions about the firms quality of product / service is good, then the price need not be lowered, but costs should be reduced to earn profits, (ii) if the quality of product / service is equal of lower than competitors, a firm may cut prices, to increase sales volume above break even volume, (iii) if some competitors have withdrawn, a firm may selectively increase prices to less price sensitive segments.

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Initiating price changes

If a firm is a market leader and wants to change the price, it must

anticipate reactions from customers and competitors.

The firm must study major competitors objectives, financial

situations, production capacity utilizations, sales, costs, and profits. It must also understand competitors mind-set, by studying their business philosophy (or concepts), culture, beliefs and past behaviors. Based on above analysis the firm should predict competitors response.
The firm must also understand that customers generally prefer

small price increases several times, rather than one sharp increase. Of course, customers would generally welcome price cuts.

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Responding to competitors price changes

A marketer should respond after answering the following questions: (i) Why the competitor has changed the price?

(ii) Is the price change temporary or permanent?

(iii) What will happen to the companys sales and profits, if it does not respond? (iv) What would be the reactions of other competitors?

The responses can be in several ways: (a) maintain price and value (benefits), (b) match competitors price, (c)

develop and launch low-price product item, (d) maintain price. The right
response depends on the business situations faced by the firm.

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PRICING POLICIES
Purpose: A firm evolves pricing policies to adjust basic prices (or price list) for different types of customers (like OEMs, users, and dealers) who buy various quantities and are located at different locations. The price

list is adjusted with different types of discounts and allowances.

Price list is a statement of basic prices of a product, having various sizes/specifications. Net price = price list (or list-price) less discount (or allowances). Business buyers are more interested in net price Types of discounts : Trade, quantity (or volume), and cash. Trade discounts: It is offered to traders or intermediaries (dealers /

distributors / stockiest ) and it should be equal and sufficient (as per

industry norms or functions performed). e.g. price list (100) trade discount (15) = net price (85)
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Volume / Quantity discounts: Here, the objective is to encourage

customers to buy larger quantities, which would reduce the costs of selling, inventory carrying and transportation. The quantity (or volume) discounts are given either on single orders over a period, usually one year (cumulative basis). For example,

Size of each Purchase order

Less than 5 nos., 5 - 10 nos., 11 -15 nos., > 15 nos.,

or
or or or or

Yearly Total Purchase

Less than Rs. 5,000 Rs. 5,000 - 10,000 Rs. 10,000 - 15,000 > Rs. 15,000 , , , ,

% Quantity Discount
Nil upto 3 upto 6 upto 10

Above discounts are applicable for all types of customers OEMs, users, and dealers / distributors.
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Cash Discounts: The objective is to get prompt payments. If a credit customer pays the bill before dispatch or within 7-days of dispatch, the customer is given cash discount on the gross amount of bill. The extent of cash discount depends on the bank rate of interest. Give cash discounts thru credit notes and the cheques, instead of including it in the bills. Geographical Pricing It includes decisions on how to price the companys products to customers located in different geographic areas. There are two alternatives :

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(i) Ex Factory Pricing: It means prices quoted are based on the prices at the factory gate, i.e. freight ( transportation costs) and transit insurance costs are to the customers accounts. Hence, the landed price (or costs) to

customers vary depending on their geographic locations.

(ii) F.O.R. Destination Pricing: Here, the quoted prices include

freight costs. Transit insurance is a small amount to be covered

by the customers open insurance policy. Hence, all

customers get the product almost at the same price, despite different geographic locations. Marketer adds the average freight cost to the basic prices and then prepares the price list, or absorbs the freight cost, if competition demands.
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Taxes and Duties: Knowledge of excise duty, sales

tax, octroi, entry tax, road permits etc is

essential for sales and marketing persons, since

they have an impact on the landed price (or costs)

to business buyers.

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ROLE OF LEASING
Business buyers have options of either leasing or buying capital items like machinery. The advantages for the lessee (asset user) are : (i) conserving capital, (ii) gaining tax advantages, (iii) getting the latest products. The lessor (asset owner) often earns good income from buying firms who can not afford outright purchase. A lease is a contract (or an agreement) by which the asset owner (lessor) gives the right to use the asset to another party (lessee) in return for payment, over a specified period.
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Types of Leases: (i) Financial (or full payment) leases, and

(ii) operating (service or rental) leases

Financial leases: These are full payment, non cancellable, long - term contracts and fully amortised (sum of lease payments purchase > price of capital item)

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Operating Leases are service/rental leases, that are cancellable, short-term contracts or agreements, and are not fully amortised. The rates are higher than those of financial leases, because risk of obsolescence are of the lessor
Pricing Strategy It is based on the firms marketing and pricing objectives. Three possible alternatives are : (i) Decide lease rate to favor leasing (ii) Decide lease rate to favor outright purchase (iii) Achieve balance between lease rate & sale rate. Some business marketing firms have representatives for giving financial consultancy services to buying firms on leasing or buying.
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SUMMARY
In business marketing, price has a special meaning. For

value buyers, value based pricing is appropriate.

Factors

that

influence

pricing

decisions

(or

price

determinants) are: (i) pricing objectives, (ii) customer

analysis, (iii) competition analysis, (iv) cost analysis (v)

government regulations/policies
Pricing strategies for different product-market situations

are: (a) competitive bidding in competitive markets, (b) new product pricing (c) pricing across product life cycle.

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 Initiating price changes and responding to competitors

price changes are also parts of pricing strategies.

Pricing policies include adjustment of basic prices (or price

list) with different types of discounts like volume, trade, and cash, as well as geographical pricing.

Leasing or buying options are available to business buyers

for capital items like machinery. Financial and operating are two types of leases. Pricing strategies are made either to favour leasing or outright purchase, or balance between leasing and buying .
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