leesohn8 pricing

Determining Demand - Customer Perception of Price

Customers perceive a total product including core benefits, product attributes, and support services yielding a package of benefits they need. These benefits must be balanced against the costs customers will experience to gain them.

net outlay

The most important cost is the of funds required from the customer firm to gain these benefits. This outlay is perceived by the customer not simply in terms of the initial price, but in terms of the value received for the expenditures over the useful life of the product.

Net Outlay of Funds

The most important cost is the of funds required from the customer firm to gain these benefits. This outlay is perceived by the customer not simply in terms of the initial price, but in terms of the value received for the expenditures over the useful life of the product.

Discounted Cash Flow

Customer firms are rather sophisticated in their application of discounted cash flow to pricing offered by vendors and they understand the net difference between one offer and another.

Customer Benefits

fall into functional, operational, financial, personal, and relational categories.

Functional

What the product can do.

Operational

Reliable + Durable.

Financial

Financial Returns (Payback Period).

Personal

Benefit to the decision-maker.

Relational

Trust + Supplier Commitment.

Strong Business Relationships

Building trust, good communication, and long-term cooperation with other businesses.

Joint Working Arrangements

Two or more businesses working together by sharing resources, responsibilities, information, or activities to achieve a common goal.

Customer costs

include acquisition costs, which include the initial price less discounts plus freight, installation and taxes, operational costs, including internal coordination, training, possible downtime, switching costs (discussed below),

Acquisition

(Getting the Product) Initial price less discounts; Freight; Installation; Taxes.

Operational Costs

(Using the Product) Training; Possible downtime; Switching costs.

Risk-Related Cost

(If Things Go Wrong) Product failure; Risk to the firm; Personal career-related risk.

Value-in-Use Pricing

means the vendor captures some of the benefits realized by the customer. This means the seller sets the price based on the value or benefits that the customer receives from using the product, rather than focusing only on its production cost.

Co-Creator of Value

In their conception, the customer is a co-creator of value and can define value-in-use in terms of their goals or objectives.

preventative

This focus on solving problem.

Promotional

This focus on increasingly productivity and effectiveness.

Traditional Pricing Strategies

may not be useful in solution marketing since solutions often require special capabilities and knowledge for which costs are not easily determined for each transaction, economies of scale may not be realized, and customized solutions are unique and difficult to compare to competition.

supplier Firms

often believe they are selling solutions when in fact they are only selling bundled products and services which the customer can easily de-bundle. They conclude that most firms are using traditional pricing approaches and that value pricing models are being very infrequently used.

Price Sensitivity

Customer reaction to price changes. Shows how much price affects buying decisions.

High Sensitivity

Customers easily switch. Price matters more. Customers are more likely to change their buying decision because of price.

Low Sensitivity

Customers are less affected by price. Price matters less. Customers are more willing to pay even when the price increases.

Customer Economics

Percentage of total expense; parts supplier, OEM or end user; importance to operations.

Search

Cost of information search; ease of comparing competitive alternatives; switching costs.

Usage

Should the item be of extreme importance to the successful operations of the customer’s firm, price sensitivity will tend to decline because reliability becomes paramount.

Competition

Differentiation; perception of price.

Pricing Flexibility

will also be reduced if the customer has to resell the product into a very competitive market. For example, when customers resell products in a highly competitive market, they have less freedom to set their own prices because they must remain competitive.

Switching Costs

__ are all the costs associated with changing from one particular product or service to another.

Cost

For marketing managers, developing reliable costs to use in pricing decisions is often a frustrating process. Often, many products are made in the same factory and the allocation of costs by the finance department is often arbitrary.

costing process

is the method a company uses to identify, calculate, and assign the costs involved in producing its products or services.

Activity Based Costing (ABC)

____ allows a firm to more accurately determine what costs should be assigned to particular product lines and customers. s a method of calculating the cost of a product or service by identifying the different activities involved in producing or delivering it and assigning costs based on how much each activity is used.

Learning Curve (or Experience Curve) Theory

simply states that costs decline rapidly with each doubling of output of a particular product. Experience curve effects come from three major sources (Day and Montgomery, 1983):

Learning

Increased efficiency because of practice and skill or finding new and better ways to do things.

Technological Improvements

New production processes and product changes which improve yield.

Economies of Scale

Increased efficiency resulting from larger operations.

Rigidity

Means being too fixed or inflexible, making it difficult for a business to adjust or make changes when needed.

Aggressive (Penetration) Pricing Approach

Generally the __ approach to gain market share is justified in three circumstances. First, in new or underdeveloped markets where customers are very price sensitive, price may be the weapon of choice to establish a secure market presence before competitors can move. Second, where fixed and variable costs will assuredly drop with a rapid increase in volume. And finally where competitors are weak or have rigid high costs a firm may use pricing to place a severe strain on its competitors who will probably not be able to match the firm’s lower prices (McKinsey Quarterly, 2003).

Monopolistic Competition Situations

In __smaller firms would realize no benefit by attempting to price lower than the dominant competitor since the large firm could easily match the smaller firm’s prices or even retaliate by lowering prices further, putting a much larger financial strain on the smaller firm than it would realize itself.

High Growth or Hyper-Competitive Markets

In __ some firms may attempt simply to disturb the status quo. An important tool in these markets is the race to the next price point. While this is more common in consumer markets, there is a strong effect in B2B markets as well.

Market Leader

When a ___ does not move toward that price point rapidly, new aggressive competitors will do so. This is true even in the case where these smaller competitors have to sell below their costs. In the hyper-competitive situation, the learning curve has its most telling effect.

Countering direct competitive efforts

____ requires creativity to differentiate the firm’s offering from its competitors’. Instead of competing through price alone, a business uses creativity to offer something unique that makes customers choose its products over competitors.

Competitor Reaction

Understanding your competitors’ current position is an important factor affecting the price but an equally important aspect of this decision is ___With this, businesses must consider not only their competitors' current prices but also how competitors might respond when they change their own prices.

Sophisticated Companies

(are businesses that use advanced tools, technology, and information to make smarter business decisions) are able to include in their data warehouse information about past competitive reactions to pricing moves. This knowledge can help the manager make more informed decisions about potential competitive actions.