SMM 7.2

• Pricing is a critical yet often overlooked aspect of business-to-business marketing

  
• Research indicates that pricing decisions have a significant impact on profitability

  
• Many companies fail to conduct systematic research on pricing, and pricing receives comparatively little attention from marketing scholars
• Managers often hold misconceptions about pricing, such as the belief that industrial buyers are highly price-sensitive
• Evidence suggests that industrial buyers often prioritize factors other than price when making purchasing decisions
• Price


  The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service
• Customer value–based pricing


  Setting price based on buyers' perceptions of value rather than on the seller's cost

  
• Cost-based pricing


  Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk

  
• Fixed costs (overhead)


  Costs that do not vary with production or sales level
• Variable costs


  Costs that vary directly with the level of production
• Total costs


  The sum of the fixed and variable costs for any given level of production
• Price - Cost = Profit

  
• 5% in Price increases 22 % in earning (EBIT)
• 5% in Sales increases 12 % in earning (EBIT)
• 5% in Cost decreases 10 % in earning (EBIT)
• The business environment presents numerous challenges for pricing strategies, including deflationary pressures and the impact of the internet on price comparisons
• Business buyers are increasingly sharing pricing information and improving their negotiation skills, adding pressure on organizations to refine their pricing strategies
• This session explores the fundamentals of business-to-business pricing, including costs, customers, and competitors
• It delves into strategic pricing aspects such as price positioning, the pricing plan, and the involvement of different departments in the pricing process

  
• Furthermore, it addresses the influence of long-term buyer-supplier relationships and the bidding process in competitive tendering conditions
• The Three Cs of Pricing

  Costs, customers, and competitors are the three key factors influencing pricing decisions

  
• Relevant costs associated with production or service delivery establish the minimum price ("price floor")

  
• Customer-perceived benefits or value determine the maximum price ("price ceiling")

  
• Competition and competitor strategies define the feasible pricing range between the cost floor and customer benefit ceiling

  
• Cost-plus pricing


  Involves calculating the average production cost and adding a standard profit margin

  
• Cost-plus pricing overlooks competitors and customers, making it flawed
• Cost-plus pricing encounters a fundamental logical flaw: to set a price, one needs to know the average cost of production, which in turn depends on sales volume, influenced by price

  
• Overestimating sales volume leads to higher fixed costs per unit, resulting in lower profits, while underestimating volume leads to lower fixed costs per unit and higher profits
• Cost-plus pricing can lead to further complications if sales fall below forecasts, prompting firms to raise prices to meet profit targets, which could backfire by reducing sales
• Break-even sales analysis (cost-volume-profit analysis) helps address questions regarding pricing decisions, offering insights into the relationship between costs, sales volume, and profits

  
• Break-even pricing, or target return pricing


  The firm sets a price to either break even or achieve a target return on production and marketing costs

  
• Demand elasticity is crucial in pricing decisions, often overlooked in cost-plus pricing
• Managers rely on demand responsiveness assumptions, typically measured by demand elasticity
• In normal demand, quantity demanded decreases as price increases, following the law of demand
• Perverse demand involves a unique situation where demand increases as price rises below a certain threshold
• Most business markets deal with normal demand scenarios
• Elastic demand


  A small price change results in a significant demand change
• Inelastic demand


  Requires a substantial price change for demand to change significantly
• Price elasticity of demand


  How responsive demand is to changes in price

  
• Inelastic demand implies that consumers are less sensitive to price changes, while elastic demand indicates greater sensitivity