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1. Characteristics of Industrial Pricing 2. Factors Affecting Industrial Prices 3

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1. Characteristics of Industrial Pricing 2. Factors Affecting Industrial Prices 3 Industrial Pricing • The objective is to help understand : 1. Characteristics of industrial pricing 2. Factors affecting industrial prices 3. Industrial pricing objectives/methods/approaches/policies 4. Leasing 5. New product pricing The Right Price • Uniqueness of price in the marketing mix is that it is the only element that generates revenue, all other elements incur costs. • Right price is one of the important determinants of business success. • Price has to be consistent with other marketing mix elements and also has to be responsive to the demand. • Demand or competitive conditions sometimes make the absorption of full cost into price impossible. • Companies with specific objectives sometimes use price as a strategic variable to achieve the firm’s objective. Characteristics of Industrial Prices- 1 1. True price an industrial customer pays is different from the list price because of delivery & installation costs, discounts, training costs, trade- in-allowances, financing costs etc. 2. Price is not an independent variable. It is intertwined with product, promotion and distribution strategies. 3. Price of industrial goods cannot be set out without considering other products that are complements or substitutes sold by the company. 4. Industrial prices are established, in many cases, by competitive bidding on a project-by-project basis. Price resolutions through negotiations is very common. Characteristics of Industrial Prices- 2 5. Prices is often a more flexible decision area since it can be altered in numerous ways such as changing ¾ The quantity of goods and services, ¾ Premiums and discounts offered, ¾ Time and place of payment 6. Industrial pricing is often characterised by an emphasis on fairness. Industrial buyers are able to estimate vendors production costs and expect price increases to be justifiable. 7. Industrial prices are affected by a host of economic factors such as inflation, interest rate changes, exchange rate fluctuations etc. Factors Influencing Pricing Company/ Country Image Competition Exchange Rate Pricing Costs Decisions Experience Curve Strategic Government Objectives Factors Market Characteristics Factors Affecting Pricing-1 • Marketing Objectives – This is very important factor deciding the price. E.g. in case of market penetration, price charged is low. • Competition – Competitive environment affects the price. The severe the competition, lower the pricing freedom. • Firm Size – In many industries, dominant firms often set the price trends. • Product Type – Price competition is common in respect of products which are not amenable to differentiation and which are standardised. • Product Life Cycle – Pricing over PLC is different at different stages. • Price Leadership – It is, in essence, a tacit concurrence by major firms in the industry with the wisdom of leader’s pricing decision. Factors Affecting Pricing-2 • Product Differentiation – If the company’s product is highly differentiated compared to competition, or it has some strong unique features, the company has more freedom to manipulate the price. •Costs– The flexibility a firm can enjoy in pricing depends to a large extent on its cost efficiency. • Market Characteristics – Apart from competition, factors like demand trends, importance of the product to the business and trade margins are relevant to the pricing. • Exchange Rate – Fluctuations in the rate affect the the price of imported equipment and in turn the domestic prices. • Image – The price a firm may charge also depends on the image of the firm and the country. Poor quality image comes in the way of obtaining a better price. Factors Affecting Pricing-3 • Government Factors – Pricing is influenced by government policies and regulations. 1. Regulation of Margins – When these are dictated by government, marketers lose the pricing freedom. 2. Price Floors and Ceilings – These limits sometimes are dictated by government. 3. Subsidies – Enable the sellers to reduce the price without incurring the losses. 4. Taxes, Tax Concessions and Exemptions – Some sectors enjoy certain tax concessions which help them to lower the price. 5. Other Incentives – Like cheap credit, marketing assistance etc. also influence price. 6. Government Competition – Direct competition in the market affects pricing. 7. International Agreements – Prices of international commodities are controlled by quota agreements, buffer stocks etc. Pricing Objectives-1 • Market Penetration – A firm may attempt to penetrate market with a low price. • Market Share – Price may be manipulated to increase the market share. • Market Skimming – Product is introduced with high initial price to skim the cream. • Fighting Competition – A price reduction by competitor have to be countered by price cuts. • Preventing New Entry – Low price is set to deter competitors from entering the market. • Shorten Pay-back Period – When the market is uncertain, recouping the investment at the earliest is the objective. Pricing Objectives-2 • Early Cash Recovery – A firm with liquidity problem may give priority to generate a better cash flow. • Meeting Export Obligation – To meet specific export obligations, a company may even imply price lower than the cost. • Disposal of Surplus – Confronted with surplus stock, company may force to dispose surplus at any price. • Optimum Capacity Utilisation – In such case, achieving required quantity of exports is the objective. • Return of Investment – Achieving target rate of return is the most important pricing objective. • Profit Maximisation – Many times profit maximisation is the primary pricing objective. Costs in Industrial Pricing • Types of costs in Industrial Marketing : 1. Production costs – These are two types namely - ¾ Fixed costs – a. costs which remain fixed irrespective of level of production, like investment in land, building and plant and machinery. b. It is the cost which remains same over a range of output. c. As the production increases, the average fixed cost per unit falls. ¾ Variable costs – These are costs which vary with the variation in the level of output and includes labour and material costs. 2. Selling and delivery costs – Includes cost of holding stocks, packing, transport, documentation, inspection, advertising, personal selling etc. Fixed, Variable and Total Costs Total Cost Total Variable Cost Total Variable Cost Costs Fixed Cost Total FixedTotal FixedCost Cost Production Pricing Methods/Approaches Cost Based Pricing • Cost based pricing, also known as cost plus pricing, is a common method of pricing. • Price=[fixed cost+variable cost+ overheads +marketing cost] + specified %age of total costs • Advantages of the cost plus pricing are : 1. Covers all the costs 2. Designed to provide target rate of margin 3. Generally, a rational and widely accepted method 4. Easy to comprehend and simple method Disadvantages are : 1. Cost calculations are based on predetermined level of activity. Variations in the activity will vary the costs rendering this method unrealistic. 2. Ignores the price elasticity of demand. 3. Imparts an in-built inflexibility to pricing decisions 4. Opportunity to charge a high price is foregone. 5. Is not helpful in to tasks like market penetration, fighting competition. Pricing Methods/Approaches Market Oriented Pricing • A very flexible policy in the sense that it allows the prices to be charged in accordance with the changes in the market conditions. • Referred to as what the traffic will bear method. • Advantages are : 1. Very flexible policy 2. Price is based on market conditions 3. When the PLC is expected to be short, this policy will enable the firm to recoup the investment fast. Disadvantages are : 1. Difficult to estimate what the traffic will bear 2. There is a chance of ignoring elasticity of demand 3. If what traffic can bear in one market is lower than what it is in another, it could lead to development of grey market. Pricing Methods/Approaches Following Competitors Pricing • Important alternative ways of this policy are : 1. Setting the price at same level as of competitor 2. Setting the price below that of competitor 3. Pricing higher than that of competitor’s Advantage of this method are : 1. It is a very simple method 2. It follows the main market trends 3. It has relevance to competitive standing of the firm Disadvantage and limitations are : 1. If competitor’s price decisions are unrealistic, the follower will also go wrong on the price 2. Cost factors of follower may not be similar to competitor’s 3. Pricing objective of firm may be different from competitor’s 4. Sometimes competitor may initiate price changes for wrong reasons Pricing Methods/Approaches • Negotiated Prices Method – Deciding price by negotiations between the seller and the buyer is common. – Major advantage of deciding price by negotiation is its great flexibility and the opportunity to put across and understand the points of both the buyer and seller. – Major disadvantage is that getting the good price is dependent on the bargaining power of the seller. • Customer Determined Price Method – In a number of cases, buyer specifies price at which he is prepared to buy the product. – Acceptance of buyer’s quotation will depend upon seller’s cost structure, business conditions, objectives etc. Pricing Methods/Approaches Breakeven Pricing • Breakeven price is the price for a given level of output (known as breakeven point or BEP) at which there is neither any loss nor profit. • If the total costs of production and selling a particular quantity of product is divided by that quantity,
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