Importance of pricing in Industrial Markets

Pricing is an indispensable part of Industrial marketing strategy.

For two reasons, price must be viewed as a part of the product offering as
well as a separate element in the marketing mix.
First, from the buying firms perspective, it is the cost that must be
weighed against product quality, delivery, and supplier service.
Second, from the sellers point of view, the price charged determines the
profitability of the product and provides the margins necessary to support
other aspects of product offering, such as post purchase service and
technical assistance.
To the industrial buyer, price is only one determinant of the economic
impact that the product will have on the firm. Buyers are concerned with
the evaluated price of a product, i.e. Total cost of owning and using the
product.
Such costs include, in addition to the sellers price, transportation charges,
the cost of installing capital equipment, inventory carrying costs for parts
and materials, order processing costs, and less apparent costs such as
production interruption caused by product failure, late delivery, or poor
technical support. This distinction between cost and price is important and
should not be overlooked by the industrial marketer.
Factors Influencing Pricing Strategies
1) Customer Demand
2) Nature of Derived Demand
3) Competition
4) Cost and Profit relationships
5) Markets reaction to and perception of price
6) Government Regulations
Customer Demand
Industrial market is diverse and complex. A single product may be used in
many different applications and have varying usage levels across
individual firms and market segments.
The importance of the product to buyers end products may also vary. For
these reasons, potential demand, sensitivity to price, and potential
profitability differ across market segments.
In setting price to influence demand, therefore industrial marketers must
understand how products are used, recognize the potential customer
benefits, 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 :

>> Analyzing Customer benefits
>> Analyzing customer costs
>> Price Sensitivity
Demand analysis seeks to analyze customers perception of values, the
relative importance of price when customer makes purchase decision, the
size of the market and different price levels. (Source : Morris and
Calantone, 1990)
One such 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 quantity produced and sold are contained in the prevailing conditions
of supply and demand. The less competitive the market, the less the
interaction of supply and demand. (Source : Dodge and Hanna, 1995)
The Nature of Derived Demand
Derived demand means that sales to an Original Equipment Manufacturer
(OEM) ultimately depend on the level of customer demand for products
that the OEM makes.
Total quantity demanded by the OEM for component parts, raw materials,
capital equipment and ancillary services will increase only as a result of
increased purchases by end-product users.
Because of the relatively distant relationship between an industrial
supplier and an ultimate consumer, what was a direct relationship
between price and quantity demanded in the consumer market becomes
an indirect and often reversed relationship.
Competition
Many industry marketers regard competitive level pricing as the most
important pricing strategy. An industrial firm should get the information
on not only the competitors prices and cost but also about the
competitors product quality, technical expertise and delivery
performance.
The information on competitors can be obtained in several ways. The
firms sales people and dealers can ask the buyers about the quality,
prices, services and delivery performance of the competitors during their
sales call. Sometimes firms send their people posing as buyers to
competitors firms to obtain competitors information either directly or as
percieved by the buyers. The company can buy competitors product and
take it apart to estimate the cost of production.
Once the industrial firm gets the information about the competitors
product, it can use price to position its product vis--vis competitors.

 This means that if a firms product quality is superior to all its competitors
and its services (including delivery, after-sales etc.) is equally good, it can
price its product higher than the competitors.
However if the firms product and services are similar to the competitors
then its price should be similar to that of major competitors prices.(if it
decides to price its product higher it would lose its sales)

Cost and Profit Relationships

Costs set the lower limits of a product.
Costs varies over time and fluctuate with volume.
Costs must be considered in relation to demand, competition and the
market share objectives of the firm.
Marketing, production and distribution costs are all relevant to the pricing
decision.
Various elements of cost like fixed , variable, direct, indirect, etc react
differently to changes in the production quantity.
Therefore a marketing manager should determine which costs are volume
dependent, which products or markets generate the costs, and where
opportunities for additional profits might exist.
Markets reaction to and perception of price
A firm must know what customers want in terms of product performance
As well as the price they are willing to pay, before it begins the physical
development of the product.
In this way a firm becomes able to decide the upper limit price of its
product, resulting in more profitable sale.
Many industrial products fail just because of the wrong market perception
of price.
Therefore the marketing department should rightly specify priceperformance relationships as per the value perceptions of customers.
Government Regulations
Business marketers must be aware of the effect of Government
regulations on pricing decisions. Though 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-fixing or price cartels are illegal, as per

Monopolies and restricted Trade Practices (MRTP Act).
In a real world example, the US Dept. of Justice fined several companies
and individuals, including some CEOs.

Cost Behavior over time - The Learning Curve

Also known as experience curve BCG in 1972
First recognized by Boeing in 1950s
They saw that no of hrs needed to build an aircraft decreased by abt 20%
each time the cumulative production doubled
BCG found similar results in other industries as well
Key Instructions with Learning Curve
It is volume dependant, not time dependant
-

which means as a product line matures, it takes longer to realize

any given percentage of cost reduction
In simple words, it takes longer to achieve the 10%, 15% or 20% reduction
in cost
Cost savings are not limited to the production process
-

Managerial decision making, product and process designs and good

distributive systems can all become more cost effective.

The L-C concept is not the same as economies of scale

(EOS refers to relative production efficiency at diff quantity levels at any
given point of time)
- it deals with accumulation of quantity over time and is independent
of the rate of production.

Strategic Use of L-C

Penetration Strategy An industrial firm, aiming for a dominant
position in a new product market segment will adopt an aggressive
pricing strategy.
So the price will speed up market growth as well as discourage
potential competition

Other uses of L-C

Covers sunk costs effectively
Enhances mktng efforts
Develop new mkt opportunities
Increases RnD expenditures
Raises needed working capital
Expands production capacity

Effects on Pricing analysis (Pg 512 V.Imp.)

Competitive Bidding
Significant amounts are purchased through Competitive Bidding in IMs
This system is used as a means of exploring and determining price
levels when purchasing non standardized, complex products on which
manufacturing methods may vary.
Majorly those items that do not have an established market price.
Competitive Bidding
can be closed/open
Formal invitation to potential suppliers, submitted in sealed bids
At a decided time, all bids are opened and reviewed.
Open Bids are more informal where one may write or say orally.
Costly, time consuming
Sometimes contracts are given to the lowest responsible bidder
This means that award is based on the suppliers promise and ability to
deliver, past experience with the bidder and his technical, managerial
and financial capabilities.
Questions
if there is a price cut by a competitor, what strategies should be used
to manage these price cuts?