2005:035 CIV MASTER’S THESIS Pricing in Industrial Markets A case study at Ovako Steel AB KENNETH AHLBERG MASTER OF SCIENCE PROGRAMME Luleå University of Technology Department of Business Administration and Social Sciences Division of Industrial Marketing and e-Commerce 2005:035 CIV • ISSN: 1402 - 1617 • ISRN: LTU - EX - - 05/35 - - SE Preface This thesis marks the end of my education for a master’s degree in Chemical Engineering at Luleå University of Technology. The thesis was carried out at the marketing department of Ovako Steel AB in Hällefors, Sweden. First of all I would like to thank the people at the marketing department at Ovako Steel AB in Hällefors, for giving me the opportunity to conduct the research that was developed to this thesis, and helping me find the information I needed, by answering the many questions I had. Special thanks go to my supervisor at Ovako, Åke Nyström. Secondly I would like to thank my academic supervisor Lars Bäckström at the division of Industrial Marketing and e-Commerce at Luleå University of Technology, for the invaluable help he has given me with comments along the way. Third I would like to thank Jill Franzén for helping me with the proofreading and supporting me when the research was going slow. Finally I would like to thank all other people that have helped me with this thesis. Luleå, January 2005 Kenneth Ahlberg i Abstract The aim of this thesis has been to provide a better understanding of pricing within industrial markets. Previous researchers have established that when deciding pricing strategy and ultimately the final price for a product, the marketing managers must take many factors, both internal and external, into consideration. This thesis will mainly investigate the internal factors that affect a manufacturer within industrial markets. To be able to get a better understanding of pricing within industrial markets, a case study was performed at Ovako Steel AB, a manufacturer of special engineering steel. The company operates within many markets both domestically and internationally. In many of the domestic markets, the company are market leader, both with regard to market share and price level and was therefore suitable for this study. In contradiction to previous research a finding from this study was that the investigated company actually were able to maintain a high price strategy over a longer period of time. The use of the analysis of the company’ customers and products as a tool for developing price differentiations were found to be very useful. Although the result of the analysis was not what the marketing staff had hoped for, it is a good starting point to develop a system for price differentiation. Additional finding for this study was that companies that is faced with high manufacturing costs and therefore use a high price strategy and act as price leaders in one or several markets, have to consider the use of augmented products to be able to create and maintain a high price. ii Table of Content 1. INTRODUCTION ..............................................................................................................................1 1.1 BACKGROUND ................................................................................................................................1 1.1.1 Strategic pricing.....................................................................................................................2 1.1.2 Factors affecting the price .....................................................................................................2 1.1.3 The effect of right price..........................................................................................................3 1.2 PROBLEM AREA ..............................................................................................................................4 2. LITERATURE REVIEW ..................................................................................................................5 2.1 PRICING APPROACHES.....................................................................................................................5 2.1.1 Cost-orientated pricing..........................................................................................................5 2.1.2 Demand-orientated pricing....................................................................................................5 2.1.3 Competition-orientated pricing..............................................................................................5 2.1.4 Market-orientated pricing......................................................................................................6 2.2 PRICING OBJECTIVES ......................................................................................................................8 2.2.1 Achieve a specific target return on investment or on net sales ..............................................8 2.2.2 Maintain or enhance a market share .....................................................................................9 2.2.3 Meet or prevent competition ..................................................................................................9 2.2.4 Maximize profits.....................................................................................................................9 2.2.5 Stabilize prices.......................................................................................................................9 2.3 PRICING STRATEGY ......................................................................................................................10 2.3.1 Skimming..............................................................................................................................10 2.3.2 Prestige pricing....................................................................................................................10 2.3.3 Penetration pricing ..............................................................................................................11 2.3.4 Expansionistic pricing..........................................................................................................11 2.3.5 Pre-emptive pricing..............................................................................................................11 2.3.6 Extinction pricing.................................................................................................................11 2.4 PRICING STRUCTURE ....................................................................................................................12 2.4.1 Price differentials.................................................................................................................12 2.4.2 Transaction price management............................................................................................14 2.5 PRICING TACTICS..........................................................................................................................16 2.5.1 Charging the right price ......................................................................................................17 2.6 FACTORS AFFECTING THE PRICE....................................................................................................18 2.6.1 Perceived value to customer ................................................................................................18 2.6.2 Competition..........................................................................................................................20 2.6.3 Cost ......................................................................................................................................21 2.6.4 Company overall objectives and strategies..........................................................................21 2.6.5 Demand................................................................................................................................22 2.6.6 Governmental and legal issues ............................................................................................22 2.7 COMBINING THE THEORIES ...........................................................................................................22 3. PROBLEM DISCUSSION AND FRAME OF REFERENCE .....................................................24 3.1 PROBLEM DISCUSSION AND RESEARCH QUESTIONS .......................................................................24 3.2 FRAME OF REFERENCE ..................................................................................................................26 3.2.1 Research question 1 .............................................................................................................26 3.2.2 Research question 2 .............................................................................................................27 3.2.3 Research question 3 .............................................................................................................28 3.2.4 Research question 4 .............................................................................................................29 3.2.5 Research question 5 .............................................................................................................29 3.3 DEMARCATIONS............................................................................................................................30 iii 4. METHODOLOGY...........................................................................................................................31 4.1 RESEARCH