CHAPTER 6Important Topics of This ChapterPowerPoint PresentationDifferent Companies Implementing Different Pricing ObjectivesDifferent Companies Implementing Different Pricing Objectives (cont.)Major Factors Influencing Price Decision in Business MarketPricing Methods in Business MarketPricing Across Product Life Cycle in Business Market: Life-Cycle CostingPrice-Leadership Strategy in Business MarketCompetitive BiddingLeasing in the Business MarketPricing Discount Strategies in Business MarketTen Don’ts of Successful Selling in Business MarketCHAPTER 6PRICE PLANNING AND STRATEGYImportant Topics of This ChapterPricing in Business-to-Business MarketMajor Factors Influencing Pricing Strategy in Business MarketImplementation of Different Pricing Methods in Business MarketLife-Cycle CostingPrice-Leadership Strategy in Business MarketBidding Strategies in the Business MarketLeasing in the Business MarketPricing Discount Strategies in Business MarketDifferent Companies Implementing Different Pricing ObjectivesCompany ObjectiveAlcoa 20% ROIAmerican Can Maintain market shareGeneral Foods 33% gross marginNational Steel Match the marketU.S. Steel 8% ROI after taxesDuPont Target ROI, cost-plus(continued)Take three different products and produce them by exactly the same process in three different companies.Because companies use different pricing calculations:Product prices will most likely vary by company.Price difference usually will not be consistent. Obviously, this is true if marketers use different strategic markups, but it also true of estimated cost (or even cost in production). One cost element would be fixed cost. How does each company determine how much fixed cost should be allocated to each product? Solution:Competitors’ prices may be very different from yours. Study their historical patterns of bidding. Different Companies Implementing Different Pricing Objectives (cont.)Major Factors Influencing Price Decision in Business MarketInternal factorsCompany objectivesMarketing mix valueCostsImpact on other productsProduct differentiationExternal factorsBuyersDemandEconomic considerationsEthical considerationsCompetitionSuppliersGovernment/legalPricing Methods in Business MarketMarginal pricing (contribution pricing): Attempts to maximize profits by producing number of units at which marginal cost is just less than or equal to marginal revenue.Economic value to the customer: A higher price will be paid by buyers who perceive a greater value or benefit to them than what they would receive from buying a competitive product.Break-even analysis: The point at which a firm’s revenue will equal its total fixed and variable costs at a given price.Target return on investment pricing: An annual ROI target (i.e., ROI of 20% over cost). Typically done by a mix of individual product markups over cost that average the target ROI. Cost-plus pricing: A version of target ROI pricing in which all products are marked up by the same percentage.Pricing Across Product Life Cycle in Business Market: Life-Cycle CostingIntroduction phase:Price skimming: Introductory price set relatively high, thereby attracting buyers at top of product’s demand curve.Market penetration pricing: Low price is used as an entering wedge.Growth phase:Competitive pressure and lower prices.Maturity phase:Stability in price competition.Low cost strategyDecline stage:.Lower variable cost.Price-Leadership Strategy in Business MarketPrice-leadership strategy: One or a very few firms initiate price changes, with most or all the other firms in the industry following suit.When price leadership prevails, price competition does not exist. The burden of making critical pricing decisions is placed on leading firm(s) and other simply follow the leader.Competitive BiddingCompetitive bidding: Buyer sends inquiries (requests for quotations or RFQs) to firms able to produce in conformity with requested requirements.Requests for proposals (RFPs):It involves the same process, but here buyer is signaling that everything is preliminary and that a future RFQ will be sent once specifics are determined from the best proposals.Closed Vs. Open Bidding:Government purchases requires formal andclosed bidding.Competitive bidding is open and informal.Leasing in the Business MarketAdvantages to buyerNo down paymentNo risk of ownershipAdvantages to sellerIncreased salesOngoing business relationship with lesseeResidual value retainedTypes of Lease Arrangements:Financial intuitions are the middlemen.Large firms have leasing subsidiaries.Direct-financing lease from the manufacturer.Types of Business leases:Operating lease:Short-term and cancelable.Direct Financing Lease:Long term and non-cancelable.Pricing Discount Strategies in Business MarketTrade Discount:Price discounts for the services performed by the intermediaries. Quantity Discounts:Non-cumulativeCumulativeCash DiscountGeographical Price AdjustmentTen Don’ts of Successful Selling in Business Market 1. Don’t discuss with customers the price your company charges others. 2. Don’t attend meetings with competitors at which pricing is discussed (not even professional association meetings). 3. Don’t give lower prices to your company’s own subsidiaries. 4. Don’t enter into gentlepersons’ understandings with competitors on prices, terms of sale, discounts, market share, intent to bid, or customer terminations. 5. Don’t use one product as bait for selling another. 6. Don’t require a customer to buy a product only from you. 7. Don’t forget that individual states and other countries have antitrust laws. 8. Don’t disparage a competitor’s product without proof. 9. Don’t require reciprocal purchases.10. Don’t hesitate to consult your company’s lawyer if you are