Industrial Pricing Strategies & Policies

INDUSTRIAL PRICING STRATEGIES & POLICIES • Pricing is a critical part of industrial marketing strategy • An industrial marketing manager should integrate various strategies or the element of marketing mix, (such as product,price,promotion,&place) so as to ensure that the total offering not only satisfies the market needs but also meets company's objectives

SPECIAL MEANING OF PRICE • When an industrial buying firm buys a product from XYZ supplier which is in competition with several other suppliers of similar product,it means that buying firm perceives that XYZ supplier offered highest delivered value • If there is no agreed formula on the importance to be given to various benefits,different individuals in the buying firm will have different perceptions of value provided by various supplier

Cont… • Eg.Production managers may consider quality & reliability of delivery as the most important benefit for raw materials & components supplied for manufacturing operations • Financial manager may give more importance to lowest cost & liberal payment terms • Purchase or material managers may consider reputation of the supplier firms

FACTORS INFLUENCING PRICING DECISION • • • • •

Pricing objectives Demand analysis Cost analysis Competitive analysis Government Regulations

PRICING OBJECTIVES • (1) SURVIVAL-A short-term objective followed by some companies is survival if the factory production capacity is underutilised to a large extent or unsold finished products have piled up, or due to intense competition, a firm is unable to sell its products • To keep factory going & convert inventory to sales,as a part of survival objective,an firm reduces prices

Cont… • Profits are less important than survival • Prices are set in such a way that they cover variable costs & a part of fixed costs so that company stays in business • This is done for a short-term • However,in the long run,the firm must raise its prices to cover total costs or face losses

(2) MAXIMUM SHORT TERM PROFITS • Some companies try to set prices with the objective of maximisation of shortterm profits • They look for maximum current profits • They ignore long-term performance & customer relationships • They look more market were there are no or less compititors

(3) MAXIMUM SHORT TERM SALES • Companies set prices with objective of maximising short-term sales revenue • For doing this,it is required to forcast the company sales over a period of time • They belive,that by maximising sales revenue the companies will have growth in market share & also have profit maximisation

(4) MAXIMUM SALES GROWTH(MARKET PENETRATION)

• Some companies fix prices of commodites as low as possible with the objective of maximising sales • The assumption is that market is price sensitive & that low prices will increase sales • Other assumptions are (1) Highest volume will reduce production & distribution costs, leading to higher long-term profits(2)Low prices will discourage entry of new competitors

(5) MAXIMUM MARKET SKIMMING • If market penetration price is placed at one end of pricing alternatives,skimming price would be found at the other end • Some companies set high prices in the initial stages of the product life-cycle when they introduce new & innovative products • New product is initially aimed at those market segments where demand is least sensitive to price

Cont… • The company gets maximum revenue & profits • As the time passes & sales slow down,prices are lowered in stages to attract new customers from pricesensitive market segments • The assumption is different prices can be charged to different segments of customers at different times

Cont… • The risk involved is that high profits, will attract new competitors

(6) PRODUCT QUALITY LEADERSHIP • A company may have an objective to be product-quality leader in a market • The company,therefore,produces superior quality product & charges slightly higher than the competitors price • This pricing objective results in higher profits

(7) OTHER PRICING OBJECTIVES • Between two extrems of market skimming & market penetration,there is an intermediate range of pricing alternatives • Objectives achieved are • Be regarded fair by customers • Avoid government intervention • Try to stabilise the market • Handling The competition

DEMAND ANALYSIS

Cont… • If demand hardly changes with a small change in price,then demand is inelastic • However,if demand changes to a large extent with a small change in price,then demand is elastic • Formula • Price elasticity of demand= % change in quantity demanded/ % change in price

Cont… • Eg.(1)If price increase by 2% & demand falls By 5% • Price elasticity of demand=5/2= -2.5 (the minus sign confirms the inverse relationship between price & the demand) • Demand is said to be elastic,because with small change in price ,there is drastic change in demand

Cont… • Eg.(2)If price reduced by 10 % & demand increase by 5% • Price elasticity of demand=5/10= -0.5 • Demand is said to be inelastic,because with large change in price ,there is small change in demand

CONDITIONS DETERMINING PRICE ELASTICITY OF DEMAND • The demand is likely to be less elastic(inelastic) under following conditions • 1.There are few competitors • 2.No availability of substitute products • 3.Buyers think higher prices are justified by inflation or changes in government polices on excise duty or sales tax, & others

GOVERNMENT REGULATIONS • Government have regulations to ensure fair play,& protect consumers & smaller companies • Price-fixing is illegal as per MONOPOLIES & RESTRICTIVE TRADE PRACTICES(MRTP) act • Eg.In US several companies & individuals were fined & also some CEOs were sentenced to jail in march 2000.for graphide electrode pricefixing conspiracy

PREDATORY PRICING • Is no permitted,because it takes place when a company with dominant position lowers its prices,so that new or smaller firms cannot operate in profitable manner • Eg.Rs.60 cr tender of Department of Telecommunication for supply of jointing kits.offered very low prices