A Review…

• What is a product strategy?

• Why do new products fail?
• How do we evaluate potential
market segments?
• What does diffusion process state/
resemble?

1
 Chapter 6
Pricing of Industrial Products

Outline
6.1. Factors affecting pricing
6.2. Pricing Methods
6.3 Pricing Strategies
6.3.1. Pricing new products
6.3.2. Pricing over the product life
cycle
6.3.3. product-line pricing

12/17/24 2
 Overview
Price is the amount of money charged
for a product.
It is the sum of all the values that
consumers give up in order to gain the
benefits of having or using a goods or
service.
It determines whether a product will
gain market acceptance, maintain its
market position in the face of growing
competition, and realize an optimum
profit level.
12/17/24 3
 6.1 Factors Affecting Pricing
Decisions
Important factors that influence price
strategy include:
• Competition/Market Structure
• Cost
• Demand
• Marketing objectives
• Legal considerations

12/17/24 4
 1. Competition
• There are two kinds of competitive factors
that influence price.
• The 1st the competitive effect on demand
for the marketers’ product.
• competition from directly comparable
products – pepsi against Coke.

• The 2nd the reaction of competitors to any

price move the business marketer may
make.
If the marketer raises the price, will the
competition hold its price level and hope to
pick up customers?
12/17/24 5
 Competitive Market Structure
• one of the most important factors in pricing is
the market in which the firm operates.
• Thus the appropriate starting point in pricing is
to ascertain what type of market the
business marketer is attempting to sell into.
• Economists recognize 5 types of market
structure , each presenting a different pricing
challenge.
1. perfect competition,
2.monopolistic competition,
3.pure and differentiated oligopoly,
4.pure and differentiated oligopsony, and
monopoly.
5.12/17/24 6
 .
• The seller’s pricing freedom varies with
different types of markets.
• the major criteria used to distinguish the
types of market structure are:
• the numbers of buyers and sellers, and
• the similarity of products sold by the
sellers in the market.

7
 Exhibit 6-1 Market Structure

Market Identical Differentiated

Configuratio Product Product
n
Many buyers Perfect Monopolistic
and many competition competition
sellers
Many buyers, Pure Differentiated
few sellers oligopoly Oligopoly
Few buyers, Pure Differentiated
many sellers oligopsony Oligopsony
Many buyers, Monopoly 8
one seller
 A. Perfect Competition
• Many buyers and sellers trading in a uniform
commodity.
• no single firm has control over price.
• This lack of control results from the large
number of sellers, each producing exactly the
same product.
• If a firm should raise its price above the
prevailing market price.
• Thus a seller cannot charge more than the
going price because buyers can obtain as much
as they need at the going price.
• E.g. uniform commodities such as iron, copper
etc.
12/17/24 9
 B. Monopolistic competition
• Many buyers and sellers that trade over a
range of prices rather than a single market
price.
• A range of prices occurs because sellers can
differentiate their offers to buyers.
• Firms have the greatest price-selling freedom.

• Either the physical product can be varied in

quality, features or style, or the accompanying
services .
• Buyers see a difference in sellers‘ products and
are willing to pay different prices. E.g. foods
12/17/24 chapter six pricing 10
 C. Pure Oligopolistic competition

• there are only a few sellers they are highly

sensitive to each other's pricing and marketing
strategies.
• Each seller is alert to competitors' strategies and
moves.
 Thus, price changes initiated by one firm are likely
to invite price retaliation.
 The product can be uniform (steel, aluminum) or
non uniform (cars, computers).
• It is difficult for new sellers to enter the market.

12/17/24 chapter six pricing 11

 D. oligopsony

• Oligopsonistic industries have pricing

opportunities similar to those of monopolistic
competitors.
• For example, a packaged food manufacturer
selling to the central buying units of major
corporate chain supermarkets is not very
concerned about competitor’s reactions to
its pricing.
•

12/17/24 12
 E. Pure monopoly
 Only one firm provides a certain product in
a certain country or area.
 firm has complete control of the market.
 Government monopoly => various options,
e.g. price below cost for social reasons, price
to cover costs, price high to slow down
consumption/ use
 – Private regulated monopoly => allowed to
sell at rates with “fair return”
 Non-regulated monopolies are free to price
at what the market will bear.
 Public utilities are an example of monopoly
markets.
12/17/24 chapter six pricing 13
 .
• Generally, Industrial firm can alter its sales
performance through non-price
competition such as advertising, sales
promotion, product-service variation,
channel of distribution changes, logistics
strategies, and corporate imagery.

12/17/24 14
 2. Cost
 Fixed and variable costs are of major concern to
the industrial marketer charged with establishing
price levels.
 Fixed costs are the costs that do not vary with
production or sales level
 For example, a company must pay each month's
bills for rent, heat, interest and executive
salaries, whatever the company's output.
 Variable costs are the costs that vary with the
level of production. E.g., Packaging, Raw
materials.
 Companies with lower cost can set lower prices
that result in greater sales and profits.
15
 3. Demand
• Whereas cost set the lower limit/floor of prices,
the market and demand set the upper limit. i.e.,
– Product costs – price floor (no profits below this
price)
– customer perceptions of value – price ceiling/ the
upper limit (no demand above this price)

• Before setting prices, the marketer must

understand the relationship between price and
demand for its product.
 Understand how much value buyers place on the
benefits they receive from the product,
 Then setting a price that fits this value.
16
 4. Marketing Objectives
Survival
Survival
Low
LowPrices
Pricesto toCover
CoverVariable
VariableCosts
Costs
and
and
Some Fixed
Survival
Survival
Costs to Stay
Some
Low Fixedto
Prices Costs
Cover to Stayin
Variable in
Costs
Low Prices
Business. to Cover
overcapacity,Variable Costsand
intense and
Business.
Some overcapacity,
Fixed Costs to Stayintense
in Business.
Some Fixed Costs to Stay in Business.
competition,
competition,
Current
Current Profit
Profit
Maximization
Maximization
Choose
Choosethe
thePrice
Pricethat
thatProduces
Marketing
Marketing the Maximum Current
Produces
Profit.
the Maximum
Market
Market Current
Share
Share Profit.
Leadership
Leadership
Objectives
Objectives Low
Lowas
asPossible
PossiblePrices
Pricesto
toBecome
Become
the
the Market Share Leader. highersales
Market Share Leader. higher sales
volume will lead to lower unit costs and
volume will lead to lower unit costs and
higher
higherlong-run
long-runprofit.
profit.
Product
Product Quality
Quality Leadership
Leadership
High
HighPrices
Pricesto
toCover
CoverHigher
Higher Quality
Quality
offer
offertop
topquality
qualityplus
plusinnovative
innovative
features
featuresthat
thatdeliver
deliverwanted
wanted
benefits,
benefits,
12/17/24 17
 5. Legal considerations
• From legal point of view industrial marketers
should avoid:
• Price Fixing(collusion): It is the illegal
practice of setting a price.
• it is more likely to happen when the number
of firms in a particular industry is small and
the product is relatively homogeneous (as in
the case of oligopolies).

• Where there are many firms, or when

heterogeneous products are involved,
competitors will find it difficult to agree on
what the fixed price will be. 18
 .
Exchanging Price Information
 this activity occurs when competitors
exchange information regarding prices,
inventory levels.

• Predatory Pricing
 involves the cutting of prices (usually by a
larger producer) to a point that is at or below
cost for the purpose of eliminating
competition.

19
 6.2 Pricing Methods/Approaches
• Costs, customer perception and competitors'
prices (the three Cs) are major
considerations in setting price.
Six price-setting methods:
• the cost-based approach (cost-plus
pricing, break-even analysis and target profit
pricing);
• the buyer-based approach (perceived-
value pricing); and
• the competition-based approach (going-
rate and sealed-bid pricing).

12/17/24 20
 A. Cost Based Approach
• 1. Cost Plus/ Mark up Pricing
• The most simplest pricing method is to add a
standard markup to the cost of the product.
• firms set prices on the basis of cost plus a “fair”
profit percentage.
• Cost refers to average or per unit cost.
• E.g
• Variable cost $10,
• Fixed cost $300,000,
• Expected unit sales 50,000
• Now suppose the manufacturer wants to earn a
20 per cent mark-up on sales.
• The manufacturer's mark-up price is given by:
12/17/24 chapter six pricing 21
 The manufacturer would charge
dealers §20 and make a profit of 4$
per unit

12/17/24 chapter six pricing 22

 .
• The profit markup is often set quite
arbitrarily.
• cost-plus pricing is based primarily on
supply conditions and pays little attention
to the demand side of the market.

• cost-plus pricing disregards the actions of

competitors
• places excessive attention on a firm’s
historic costs.
• It appeals especially to firms that do very
little market research. 23
 2. Break-Even Analysis & Target
Profit Pricing
• it is primarily supply oriented;
• it does give some weight to demand
conditions.
• It is used by the industrial marketer to
determine the level of sales required to cover
all relevant fixed and variable costs.
• The points where the TR are equal to the TC
are examined (results in neither profit nor
loss).

• the firm selects the point that is determined

to be the most readily
12/17/24 attainable.
chapter six pricing 24
 Suppose the enterprise wants to earn a target
profit, it must sell more than 30,000 units at $20
each.

12/17/24 chapter six pricing 25

 3. Target Profit Pricing
• In target-return pricing, the firm
determines the price that would yield its
target rate of return on investment (ROI).
• Suppose a manufacturer has invested $1 million in
the business and wants to set a price to earn a 20
percent ROI, specifically $200,000. The target-
return price is given by the following formula:
• TRn price = unit cost + desired return x
invested capital
unit sales

• = $16+ 20 X $1.000.000 =$20

• 50,000
• Target profit = 4$x50,000 units = 200, 000$ 26
 B. Buyer -based pricing
• Perceived-Value Pricing
 Offering just the right combination of quality
and good service at a fair price
 Setting prices based on buyers' perceptions
of value rather than on the seller's costs.
 Target price is set based on customer
perceptions of the product's value.
 Company needs to find out what value buyers
assign to different competitive offers.
• Then they use promotion , to build up
perceived value in buyers’ minds.

12/17/24 chapter six pricing 27

 C. Competition Based Approach:
• Buyers will base their judgments of a products value
on the prices that competitors change for similar
products.
• Thus, competitors’ prices and their possible reactions
need to be considered when setting prices.
1. Going-Rate Pricing
• The firm bases its price largely on competitors'
prices, with less attention paid to its own costs or
demand.

• When costs are difficult to measure or competitive

response is uncertain, firms feel that the going
price represents a good solution.
12/17/24 chapter six pricing 28
 .
2. Sealed Bid Pricing
• Competitive-oriented pricing is common when
firms submit sealed bids for jobs.
• In bidding, each firm bases its price on
expectations of how competitors will price
rather than on a rigid relationship to the firm’s
own costs or demand.

• The firm wants to win the contract—which

means submitting the lowest price—yet it
cannot set its price below cost.
• Thus the company would estimate the profit and
the probability of winning with each price bid.
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 6.3 Pricing Strategies

pricing strategies for

 Pricing new products
Pricing over the product life
cycle/experience curve pricing
Product -line pricing

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 6.3.1 New Product Pricing
Strategies
• New Product Pricing Strategies:
• Market skimming or
• a penetration pricing strategy.

Market Skimming Pricing:

• Setting a relatively high initial price for a
new product.
• Healthy profit margins, to recover R&D costs
as quickly as possible.

12/17/24 chapter six pricing 31

 .
• To use Market Skimming Pricing , the following
conditions should be present.
1.The buyer should be an innovator or early
adopter, a risk taker who welcomes new products.
2.The supplier has a patent or hard-to-copy
innovation

3.Variable costs are a high proportion of total

costs.
4.Thus, there are no economies of scale to be
achieved.

5.Barriers to competitive entry are high-whether

they be financial or the required R&D. 32
 Market Penetration Pricing
• Setting a relatively low initial price for a new
product.
• to penetrate the mass market immediately, to
get sales volume and a large market share.
• The following conditions favor setting a low
price:
1.The market is highly price sensitive, and a low price
stimulates market growth;
2.low variable costs, the key to profitability is building
sales volume and economies of scale quickly.
3.Many close substitutes are available; thus, a low
price discourages competitive entry
4.The product is easy to copy and there are few
barriers to entry by the company’s competitors
33
 6.3.2 Pricing over the product life
cycle
• In introduction -Charge cost-plus

• Growth - Price to penetrate market

• Maturity - Price to match or best

competitors’

• Decline - Cut price

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 6.3.3 Product-line pricing (price
lining)
 firms sell a range of products within each product
line.
 These products are related to one another,
marketed together, and provide variations on
the same general benefits required by the
customer.
 Thus, a line of products may price at a number of
different specific pricing points.
 When pricing product lines, the business
marketing manager must be aware that the sale
of one item in the line may be influenced by and
may influence the sale of other items in the line.
 The seller’s task is to establish perceived-
quality differences that justify the price
differences.
 Thanks…

Any Query??

Business Marketing 36