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  1. 1. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Student Study Guide Chapter 7: Pricing Strategies for Business Markets Summary Questions Activity Case Study Supplementary Information Summary In this chapter we examined the role that price and costing play in B2B marketing. A definition of pricing was given and then its place within the marketing was discussed. The interaction between price and products and services, distribution and promotion was examined and B2B compared with B2C. It was argued that price was an under-utilised business tool in B2B marketing and so ways that it might be used were identified and evaluated. We then went onto discuss the strategic factors that should be determining the price. Company objectives, strategies, costs, customer, market structure, levels of demand, competition and legislation where identified and related to the pricing process. It was made clear that the overriding concern was for pricing objectives was to meet both the marketing and corporate objectives and examples of different objectives were given. The main pricing strategies used to achieve pricing objectives were identified and reason given for usage. Again B2B was compared with B2C. New product pricing and pricing across the product life cycle was briefly outlined before moving on to talk about the differences between strategic and tactical pricing. The importance of costs in the pricing process, their association with marketing and the different types of costs were discussed emphasising the need to constantly monitor, control and reduce these to maintain competitive advantage. Cost and profit centre and activity based costing were recognised, as ways of trying to make certain that this would happen. Monopolies, oligopolies and competitive markets were again examined but in the context of different pricing needs. Price and levels of demand, price and competitive response and price and legislation were all shown to have an influence on pricing strategies and could b not therefore be ignored in the process. Other influences on pricing were discussed including price elasticity, price negotiations, the affect of the Internet on pricing, price and global markets and strategic and tactical methods that could be used in determining the price to be charged. Comparison between B2B and B2C markets were used were ever possible. Pearson Education © 2004
  2. 2. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Questions Students will find below a series of 10 questions and all can be answered in general terms form the information found in chapter 7. The more motivated student should be able to explore further in journals, books, articles, and across the web for more in-depth information 1 Identify the factors that need to be examined when pricing in B2B markets. What are the differences when compared with B2C markets? 2 What part will marketing theory and marketing concepts play in B2B marketing. Are there major differences when compared with B2C markets? 3 How might pricing factors differ when comparing the public sector with the commercial sector in B2B marketing? Why do some commentators argue that the movement of an organisation from the public sector to the private sector could be beneficial for cost and pricing efficiency? 4 Discuss the various pricing strategies that might be used by B2B suppliers. Give examples of companies that use the different strategic pricing approaches and examine why this might so. 5 Why might a supplier be able to charge different prices for its products and services in different regions and countries? Are circumstances the same in both B2B and B2C and what forces might work to stop this type of discriminatory pricing. 6 Discuss the proposition that ‘there are only two ways that an organisation can increase profits, sell more or reduce costs’. How might a company reduce costs both internally and along the supply chain. 7 Discuss the various pricing methods identified here. How might they be used in practice and what are the advantages and disadvantages of each? 8 Is there an ethical case for paying above the norm prices in third world countries so that working conditions can be improved? Identify and discuss examples where organisations have attracted bad publicity. 9 Identify the role that governments play in B2B product and service pricing policies. Examine the part that overseeing regulators, both nationally and internationally, have in policing the current pricing legislation 10 Identify and analyse the steps involved in determining the price of the product. Website addresses Audit Commission auditing public bodies in the UK – ( Bartertrust ( Civil Aviation Authority ( European Competition Commission – ( MarketingShout > the Ultimate Business and Marketing Dictionary ( Professional Pricing Society, dedicated to pricing management ( StudentShout marketing resource - ( ) The Competition Commission ( The International Reciprocal Trade Association ( The Office of Fair Trading ( Trading Standards Body seeing fair-play in the UK market place – UK Data Protection Body – ( UK National Audit Office ( Pearson Education © 2004
  3. 3. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Activity The questions below where current at the time of writing and both can be investigate on the web where I found a fund of information giving both sides of the argument. 1 There is a fierce dispute between the US and the EU over steel prices. The US wants an import tax because of the feeling that steel is being dumped onto its markets and causing unfair price competition for the home industry. Investigate this and similar disputes, put it in to context and discuss the wrongs and right on what’s happening 2 Identify examples of pricing fixing on the web and discuss the individual case circumstances identifying the reasons why cartel members operated in this way. 3 Look at the government, supra-government and international organisations such as the Competition Commission, the European Commission and the WTO and discuss, or prepare a presentation, on their attitude to the role that pricing plays in business markets Website addresses Audit Commission auditing public bodies in the UK – ( Bartertrust ( Civil Aviation Authority ( European Competition Commission – ( Federal Trade Commission (US equivalent of the UK Competition Commission) – ( MarketingShout > the Ultimate Business and Marketing Dictionary ( Professional Pricing Society, dedicated to pricing management ( StudentShout marketing resource - ( ) The Competition Commission ( The International Reciprocal Trade Association ( The Office of Fair Trading ( Trading Standards Body seeing fair-play in the UK market place – UK Data Protection Body – ( UK National Audit Office ( Pearson Education © 2004
  4. 4. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Case Study Price fixing cartels Congress investigates gas pricing Oil industry executives rejected charges Tuesday that they manipulated gasoline supplies to increase prices. A senator said there is strong evidence that oil companies work to maintain tight markets that produce price spikes. Opening a hearing on the volatility of gasoline prices, senators said oil industry practices of maintaining low inventories, along with growing market concentration, invited the sudden gasoline price surges that have occurred in recent years. "Price spikes are becoming a way of life . . . and not without serious consequences," Sen. Carl Levin, chairman of the Senate Permanent Investigations Subcommittee, told the oil executives. Levin cited the findings of a subcommittee report that charged refiners had withheld supplies to force up gasoline prices during tight markets, including a 1999 BP Amoco memo that gives a blueprint of actions that might be taken to maintain high prices. Levin said the "outrageous" internal memo considered by senior executives at BP Amoco, now known only as BP, outlined a series of actions that could be taken to maintain high prices in the Midwest, including shipping gasoline to Canada or getting other refiners not to ship fuel into the region. (Price spikes – price volatility and fluctuations) ©Associated Press 2002 Price fixing cartels It is universally agreed that price-fixing cartels are almost unambiguously harmful - by raising prices and restricting supply, they make goods and services unavailable to some consumers and unnecessarily expensive for others. A study by the Organisation for Economic Cooperation and Development (OECD) in 2000 estimated that in the US alone, ten recently condemned cartels cost individuals and businesses many hundreds of millions of dollars annually, affecting commerce worth over US$10 billion with overcharges of over US$1 billion and additional economic waste of over US$1 billion. The OECD calculated that the average illegal gain from price fixing is 10 per cent of the selling price, but the harm to society may amount to 20 per cent of the volume of commerce affected by the cartel. A cartel involving almost every major worldwide producer of graphite electrodes, recently prosecuted in the US, affected US$5-7 billion dollars in sales worldwide; so the total costs of all cartels would be far from trivial. Cartels are neither rare nor short-lived. One study which tried to survey nearly all international cartels successfully prosecuted by the US or the EC during the 1990s counted forty. The average duration of these cartels was 6 years. Some lasted for two decades before intervention. For obvious reasons, cartels rarely announce their formation. Therefore these represent only the tip of the iceberg. European Commission and price cartels The European Commission is constantly on the lookout for companies that are suspected of breaking the law by colluding with others to fix prices in the hope of making higher profits without the need to lower costs and become more productive necessary in a competitive environment. The Commission has the power to impose fines of up to 10% of a company's turnover in its previous financial year for infringements of the type identified in some case examples shown below. They also have the power to enter suspected company premises at any time in the search for incriminating documents. Examples are there carrying out dawn raids on a number of suspected PVC companies and on the premises of Carlsberg in Copenhagen and Heineken in the Netherlands in ongoing investigation into alleged cartel activity. Pearson Education © 2004
  5. 5. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Case examples To show how deeply rooted the problem is the following are examples of pricing cartels that have been successfully prosecuted over the last decade. One of the most notorious cases was the international vitamin cartel operated by a number of European and Japanese companies in the second half of the 1990s. The cartel was led by Hoffman La Roche AG of Switzerland and BASF of Germany, the world's two biggest vitamin makers, supported by at least six other smaller producers all agreeing to raise the price of a range of vitamins over a period of four to ten years. This massive price-fixing conspiracy inflated the cost of everything from breakfast cereal and bread to hamburgers and confectionery. The European Commission imposed fines exceeding €855 million for this breach of European competition law. The fines were by far the largest ever imposed by the Commission. They were also prosecuted in the US were Hoffman La Roche and BASF agreed to pay a total of $725 million to settle Justice Department price fixing charges. Members of the ring also face potentially massive damage claims in 25 private lawsuits still pending in four federal courts. Price fixing affects all industries and all size of companies. Record fines were imposed by the European Commission on 33 European cement producers and eight national cement associations for running a cartel involving serious breaches of EU competition law, including market sharing and regular exchanges of information. They also fined ten companies for running a secret market sharing, price fixing and bid rigging cartel in heating pipes and for attempting to eliminate a competitor. 16 European steel makers were fined a record 104 million ECU's for operating a secret cartel to determine prices and markets for steel building beams. Total fines of EUR25.72 million (US$24.65 million) were imposed on seven producers of industrial and medical gases for their involvement in a cartel in The Netherlands from 1993 to 1997. The parties involved colluded to fix the prices of several gases such as oxygen, nitrogen, carbon dioxide and argon. No company is too large is too large to escape the net. ABB ( along with German giant Siemens ( and a cluster of lesser-known companies also had to contribute to a nearly $500 million fine imposed on the German cable industry for a price-fixing scheme uncovered there in 1997. Every company active in the cable industry had to pay a part of the fine based on their market share because the authorities said every company was in the cartel. In the US senior executives can even be sent to prison operating an illegal price-fixing cartel. When auction houses Christie's and Sotheby's were found guilty of this offence prison sentences of up to three years duration were asked for by the prosecution. Call in the experts Outside agencies can be used where price fixing is suspected. Experts will analysis in detail transactions and/or bidding data to obtain a clear picture of the effect, if any, of an alleged conspiracy. Such a study may be a major element of an economic analysis of liability, impact (the fact of injury) and damages (the amount of overcharge) in price fixing and bid rigging matters as well as other matters alleging collusive behaviour. Using such data, the volume of commerce affected by alleged conspiracies can be assessed, pecuniary gains or losses can be assessed, and the duration and impact of alleged conspiracies can be evaluated. Using this information fines can be imposed and injured parties compensated. Price fixing in B2C markets Many commentators argued that the problem was more widespread and did not reside in B2B markets alone. Fears were also voiced by others including the Office of Fair Trading, consumer champions such as the consumer council and the large sections of the media about pricing misbehaviour in B2C markets. In 2000, under the slogan ‘rip off Britain’ two major investigations into anti-competitive price-fixing were instigated by the UK into price fixing in B2C markets one into supermarket prices, the other into the costs of new cars. There results where inconclusive and left a general concern about the role of ologopolies and so-called ‘complex monopolies’ in the movement and control of consumer prices. As a result competition authorities were given greater powers to tackle illegal price manipulation across entire sectors, such as petrol or supermarkets. Under these revised rules those found guilty of operating price-fixing cartels could face criminal penalties as well as heavier fines. Pearson Education © 2004
  6. 6. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Conclusion There is no doubt that governments and politicians around the world worry about the ability of large companies to work together to fix the prices. This becomes even more of a problem as organisation become larger, global and more powerful. Higher prices eventually filter through to more expensive end products for the consumers. Basic economics show that the higher the price the less goods and services will be sold. This could then cause a slow down in economic growth, a range of products and services becoming unavailable to certain groups of people across the world as well as allowing companies to become sheltered from the positive economic affects of widespread competition. Most countries have now instigated some kind of anti-competitive legislation and set up legislative bodies to stop price fixing cartels operating aware of the deleterious consequences of inaction. The problems and difficulties, however, will depend on the political will and the ability of legislators to impose enforcement. Even if organisations are caught, and that isn’t easy, whether there can be successful prosecutions will rest with the power of the courts, straightforward at a national level but much more problematic in the international arena. Case study questions 1 Discuss the reasons why oil companies and other organisations try to control the supply and demand for oil. Do you think they should be able to manipulate the price? 2 Governments with modern economies all around the world are constantly upgrading anti-price fixing laws by increasing fines and even sending proven wrongdoers to prison. (a) What are the reasons why there is this obsessive concern with price fixing cartels? (b) Do you think that the law can ever stop the practice? (c) How is it that some cartels, OPEC for example are able to operate without prosecution? (d) Discuss why you think it may or may not be stopped around the world. 3 Discuss the proposition the price fixing cartels are inherently unstable and will break down of their own accord without the exposure of illegal price fixing by the government or other regulatory agencies. 4 Do you think that market circumstances make price fixing more likely across B2B or B2C markets? Give reasons and real examples if possible. Website addresses Audit Commission auditing public bodies in the UK – ( Bartertrust ( Civil Aviation Authority ( European Competition Commission – ( MarketingShout > the Ultimate Business and Marketing Dictionary ( Professional Pricing Society, dedicated to pricing management ( StudentShout marketing resource - ( The Competition Commission ( The International Reciprocal Trade Association ( The Office of Fair Trading ( Trading Standards Body seeing fair-play in the UK market place – UK Data Protection Body – ( UK National Audit Office ( Pearson Education © 2004
  7. 7. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Supplementary Information We often see unknown or uncertain pricing and costs terms used and so I thought it might be useful to include a small pricing glossary here for the use of both students and instructors alike. It comes from a business and marketing glossary I wrote for my website and it can be seen in full on Business and Marketing Glossary. Price glossary Price - the value agreed upon by the buyer and the seller in an exchange. One of the four controllable variables of the marketing mix (See Four Ps (4Ps); Product; Place; Promotion.) Price Adjustment – changes in retail or trade price to meet market conditions. Price Band - the range within which a product can be priced as dictated by competitive intensity and the perceived value of the product to consumers. (See Price Platform.) Price Brand - a low price brand used tactically to combat the competition. Also known as a Fighting Brand. Price Bundling - various individual products are offered at a price less than the sum of the prices of the products sold individually. Price Ceiling - A price above which market prices are not permitted to rise. Usually imposed by legislation (See Price Floor). Price Collusion - companies working together to set the market price. This activity is usually considered to be illegal. (See Price Manipulation.) Price Comparison - the customer using price, rather than other benefits such as the brand or quality or delivery to compare one product with another. Price Competition - price is used as the major means of differentiating the product of one firm from that of a competitor. (See Non-price Competition.) Price Cycle - the seasonal, regular fluctuation in prices, e.g. on vegetables. Price Deflator - an index used to eliminate the effect of inflation. Price Differential - charging different prices in different markets, e.g. a supermarket charging more in Kings Lynn than in Camden Town. Price Discount strategy - always having some kind of price cut/sale to attract the customer, e.g. MFI or Moben Kitchens. Price Discovery - the transition from the general price level resulting from price determination to the price for a particular quantity of a product with specific characteristics, such as location, quality and size of lot.) Price Discrimination - selling products at different prices to different intermediaries; Price/Earnings Ratio (P/E ratio) - market price per share divided by Earnings Per Share (EPS). This ratio gives an indication of the market’s view of the company’s growth potential, business risks involved and dividend policy. In general, the higher the P/E ratio, the more highly rated is the company by the market. Price Effect - the effect of a price change on demand for a product. Price Elasticity - the percentage change in price related to the percentage change in demand. Inelastic demand = price changes cause little or no fluctuation in demand. Elastic demand = price changes cause large fluctuations in demand. The opposite is Price In-elasticity. Price Equilibrium - the market price when the demand for a product equals the amount willing to be supplied at that price. Price: Factory Gate Pricing – Buyers sometime negotiate a rock-bottom price with suppliers by collecting the goods from the seller’s factory. Price Fixing Agreements - companies joining together to dictate the price of products. It is illegal Price Floor – a price below which products are not allowed to be sold (See Price Ceiling.) Price: High and Low - depending on the product, e.g. whether unique, in short supply, perceived to have added value etc. Pearson Education © 2004
  8. 8. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Price Incentives - using price as a sales promotion to encourage purchase and trial. Price In-elasticity - See Price Elasticity. Price Instability - fluctuations in price arising from unstable demand and supply conditions. Price Leader - powerful companies set the prices and others follow, e.g. Shell pushes up the price of petrol and all the others follow. Price Lining - pricing different products in a product line at various price points, depending on size and features to make them attractive to a wider range of customers. Price Manipulation - deliberate temporary distortion of a market price away from the competitive level by one trader influencing price, or several traders acting together to influence price. Also known as Price Collusion. Price Mechanism - prices going up and down determine levels of supply and demand in a free market. Price: Misleading – in the UK, under the Consumer Protection Act (1987), any pricing method that can be shown to be misleading the customer, e.g. price reduction that is not in fact a price reduction. The Office of Fair Training (OFT) will respond with fines if necessary. Price: Non-Price Competition - competing on added value, brands, sales promotions, guarantees etc., rather than price. Price Objectives - pricing for market penetration, profit, revenue, what the market might bear, in line with the competition, customer perception, customer satisfaction. Linked with overall marketing and corporate objectives. Price Objection - an objection raised by the customer during the sales presentation about aspects of the price, e.g. too high, credit terms, discounts, allowances, delivery etc. Price of Non-Quality (PONQ) - what it costs to do things wrong, resulting in losses such as time, money and opportunity. An equation for estimating PONQ is: the amount of time required to fix a defect multiplied by the number of defects multiplied by the hourly wage rate (fully burdened with overhead, overtime, benefits, etc.). Price Parity - pricing products at the same margin as competitors. Price Penetration - setting a low price to gain market share. Price Perception - whether the customer sees price and value in harmony, or too high, or too low. Price Platform – the price levels generally accepted by all businesses in the marketplace e.g. TVs at £199, £299, £299 and so on. Also known as a price plateau. (See Price Point.) Price Push - inflation caused by continually increasing prices on goods and services. Price: Reference Price - the price that the customer will expect to pay for a product type. Price Sensitivity - the interplay between price and supply and demand. (See Price Elasticity.) Price Setter - large or monopoly companies able to dictate price levels in the industry. (See Price Taker.) Price Signalling - sophisticated ways that companies tell one another their pricing strategies without overtly colluding and thus breaking the law, e.g. talking in the press about the need for general price increases will signal intentions to other competitors. Price Space - the price difference between items in a product line. Often critical as too little space may confuse buyers and too much space may leave gaps to be exploited by competitors. Price Support - governments supporting artificial price levels through subsidies or product purchase. It is frowned upon in the EU unless it is used to support infant industries Price Taker - small companies unable to dictate policy and so can only accept the price given by others. (See Price Setter.) Price-Value Relationship - the continuous interplay that customers make between price and quality, e.g. ‘is it worth paying a little more for the extra value?’ Price Wars - companies competing aggressively on price first one, then another, driving down the price. Pricing: Follow the Leader - staying as near as possible to the market leader with regard to price. Pricing; Leader - pricing products at lower than usual prices in order to attract shoppers. Also known as loss leader pricing. Pricing: Loss leader - pricing products below cost in order to attract customers. Pricing Method - the way the company chooses to price its products. This, might be based on costs, competition in the market, customer demand and customer perception. Pricing Policies - ways and directions in which firms, the government and other agencies seek to influence the prices of goods and services. Pricing Policies and Strategies - how pricing sits within marketing planning and the part that it plays in the marketing mix. Pearson Education © 2004
  9. 9. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Pricing: Pre-Emptive - initial low price to dissuade market entry by the competition. Price Skimming – the price is set high on market entry to obtain a premium form a customer segment willing to pay more for an innovative product. Gradually the price is reduced as competition enters so as to attract or keep more price sensitive segments. Pricing Strategy - the long pricing methods used to achieve marketing objectives, e.g. every-day-low- prices, premium pricing, penetration pricing. Cost glossary Cost - the total money, time and resources associated with a purchase or activity. (See Opportunity Cost.) Cost advantage – the cost advantage that one company has over another, often because of economies of scale. Cost/Benefit Analysis - a technique designed to determine the feasibility of a project or plan by quantifying its costs and benefits. It can apply to all form of costs other than finance. Cost Centre - any area of business no matter how small or how large where all costs can be realistically apportioned. (See Profit centre; ABC costing.) Cost Drivers – the structural cost determinates of each activity that are largely under a company’s control e.g. economies of scale, staff skills and learning, integration of activities, capacity utilisation. Vertical integration. Cost of Capital - the amount the company must pay for its capital. Cost of Funds - the interest cost that a financial institution must pay for the use of money. Cost of Goods Sold (COGS) - on an income statement, the cost of purchasing raw materials and manufacturing finished products. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. Also known as Cost of Sales. Cost Per Customer Purchaser - a cost effectiveness measure used in direct marketing based on the cost-per-sale generated. Cost Per Ratings Point - a computation used by media buyers to compare the cost efficiency of broadcast programmes that divides the cost of commercial time on a programme by the audience rating. Cost Per Thousand (CPT) - a computation used in evaluating the relative cost of various media vehicles that represents the cost of exposing 1,000 members of a target audience to an advertising message. Cost Plus System - method of compensating advertising agencies whereby the agency receives a fee based on the cost of the work it performs plus an agreed amount based on the success of the campaign. Cost-push inflation - in economics, a situation in which rising costs leads to rising prices. (See Inflation; Demand-Pull Inflation.) Costs: Direct - a cost directly attributable to the manufacture of a product. Opposite is ‘Indirect Cost’. Costs: Full - the full cost of producing a product, including full allocation of overhead costs and variable costs. (See Cost Centre.) Costs: Historical - an accounting principle requiring all financial statement items, both fixed and variable, to be based on original cost. Costs: Indirect - the cost not directly attributable to the manufacturing of a product. Opposite is ‘Direct Cost’. Costs: Fixed - a cost that does not vary depending on production or sales levels. Costs: Marginal - the cost associated with one additional unit of production. Also known as Incremental Costs. Costs: Mixed - a cost with both fixed and variable elements. Costs: Operating - the day-to-day expenses incurred in running a business, such as sales and administration, as opposed to production. Also known as Operating Expenses. Costs: Opportunity - the cost of passing up the next best choice when making a decision, e.g. the opportunity cost of me working is no holiday. Costs: Replacement - the amount it would cost to replace an asset at current prices. Costs: Step variable costs - variable costs which change dramatically at certain points because they involve large purchases that cannot be spread out over time. Costs: Sunk - cost already incurred which cannot be recovered regardless of future events. So forget and don’t pine! Pearson Education © 2004
  10. 10. Ray Wright, Business-to-Business Marketing: A Step-by-Step Guide Costs: Total - the sum of fixed costs, variable costs and semi-variable costs. Costs: Transaction - costs incurred when buying or selling assets. Costs: Unit - cost per item. Costs: Variable - a unit cost that depends on total volume. Cost/Benefit Analysis A technique designed to determine the feasibility of a project or plan by quantifying its costs and benefits. Cost Value Logic - the use of economic definition of costs to reveal which parts of a business should be retained, sold or shut down, and which should be kept or expanded: based on the notion of opportunity cost and economic rent. Cost-Per-Thousand (CPT or CPM) - used in advertising as a measure of cost per thousand people viewing or reading the advertisement. Cost-Plus Pricing - a pricing approach where an agreed percentage mark-up is added to the costs (fixed and variable) of product, e.g. my full costs (fixed and variable) on the product is £20 add 50% mark-up and I will sell at £30. It is unrealistic in a competitive market Website addresses Audit Commission auditing public bodies in the UK – ( Bartertrust ( Civil Aviation Authority ( European Competition Commission – ( MarketingShout > the Ultimate Business and Marketing Dictionary ( Professional Pricing Society, dedicated to pricing management ( StudentShout marketing resource - ( The Competition Commission ( The International Reciprocal Trade Association ( The Office of Fair Trading ( Trading Standards Body seeing fair-play in the UK market place – UK Data Protection Body – ( UK National Audit Office ( Pearson Education © 2004