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Negotiating price2

  1. 1. The MAANZ MXpress Program Negotiating Price Dr Brian Monger Copyright January 2013. This Power Point program and the associated documents remain the intellectual property and the copyright of the author and of The Marketing Association of Australia and New Zealand Inc. These notes may be used only for personal study associated with in the above referenced course and not in anyeducation or training program. Persons and/or corporations wishing to use these notes for any other purpose should contact MAANZ for written permission. MAANZ International 1
  2. 2. MAANZ International • MAANZ International, is a Not for Profit, internet based professional and educationalinstitute which has operated for over 25 years. • MAANZ International offers Professional Memberships; • Marketing Courses (Formal and Short) • And Marketing Publications • MAANZ International 2
  3. 3. Negotiating Price • In many instances, customers do not pay a standard list price.• Instead, the final price is determined through a process of negotiation between buyer and seller. • The negotiation process becomes necessary when neither of the parties to a transaction has the power to impose its own will over the other(s). MAANZ International 3
  4. 4. A Word about Price and Value• The Oxford English Dictionary refers to value as `an estimate of worth or utility, which would indicate that value is the outcome of some sort of assessment or estimate. MAANZ International 4
  5. 5. Marketing as an Exchange of Value • What is a market transaction all about? In essence its about exchanging value. There must be something of value created by the seller, offered and exchanged with something of value from the buyer. • • Customer value is represented in a series of trade-offs between what the customer gives relative to what they receive. MAANZ International 5
  6. 6. Creating Customer Value • The job of any market-driven organisation is not to sell a product, but instead to create value for customers. • Value creation, is the source of competitive advantage in the marketplace.• The fundamental purpose of any business is to create value where there was none before. MAANZ International 6
  7. 7. Marketing as an Exchange of Value•Various authors have provided •A trade-off between received value andvariations on this simple approach such desired valueas: • A customer makes investments in order• to achieve a number of desired benefits.•A trade-off between product quality Similarly organisations also make a seriesand the price of investments in order to achieve a• A trade-off between a set of benefits series of designed benefits andand specific categories of costs outcomes.• The hierarchy of derived benefits • The actual set of benefits they both getobtained from particular product out the exchange must be weighedattributes when using the product against their investments.• The resulting emotional, practical andlogical worth associated with the product• MAANZ International 7
  8. 8. Pricing Problems are Universal• For marketing strategists, Pricing is themoment of truth. All of marketing comes to focus in the pricing decision. MAANZ International 8
  9. 9. The Universal Approach is Simply Wrong• One of their main problems is that they are not marketers and do not understand why they should be.• It is up to the marketer to understand whytheir target segments buy. Even if the physical product is the same (eg 2 airlines) some simply prefer one over the other MAANZ International 9
  10. 10. • Some like an organisationspositioning/attitude (Virgin/Body shop) If youcan develop a preference you can charge more for it. You may choose not to charge more - but the objective of marketing is to increase the preference. MAANZ International 10
  11. 11. The Universal Approach is Simply Wrong• Recent significant price rises in petrol showed that the industry wasnt anywhere near as price sensitive as was once considered.• I personally would fire any so called marketer who couldnt add value and get a better price than the industry norm. MAANZ International 11
  12. 12. Not Everyone Wants the Lowest Price! But Everyone Wants the Best Value MAANZ International 12
  13. 13. Not Everyone Wants the Lowest Price! • There are many elements that can increase the value in any transaction (for both parties). That is, everyone gets better value out of the deal. Low prices are seldom going to be able to provide much in the way of added value. • When a marketer offers a low price, the profit margin per item falls. Perhaps an increase in volume will compensate for this. However, the closer a price comes to breakeven (costs V income) the less value there will be for all concerned.• The seller is closer to going broke and cannot offer any increased value to the buyer. If in fact they do go broke, the buyer has to find another supplier.• A strategy that has an over-reliance on price-cutting is an overly simplistic strategy. It is the easiest strategy for a rival to copy and the hardest strategy to defend. MAANZ International 13
  14. 14. • Industries that have firms focused on the belief that lower pricing is the strategy of success will tend to develop price wars. Very low prices price lead to low margins per unit. Unless this is off-set by high volume (which isbecoming rarer in most markets) organisations and ultimately their customers will suffer. • It is in every-ones interest MAANZ International 14
  15. 15. • A firm with very low margins cannotundertake value adding activities or developnew products. Ultimately they will try to cutcosts in areas that buyers consider core value areas, and lose customers. Firms with lowmargins are always that much closer to goingbroke (with the resultant effect on suppliers,intermediaries and employees - not only the owners). MAANZ International 15
  16. 16. • Good marketing is not about lowering prices (any fool can do that really!). The job of a good marketer is to increase margins and deliver better value (not less) to buyers. MAANZ International 16
  17. 17. To the purchaser, there are a number of ‘costs’to be considered as part of the payment. They include: •Time Investment. •Risk•Opportunity costs What would be the best use of my money at the present moment? 5 MAANZ International 17
  18. 18. The Lowest Price Is Likely to be the Worst Thing You Can Do• The lowest price is usually bad for everything: • Poor strategy • Poor profitably • Selling costs may rise • Poor marketing • Bad for brand image • Makes future sales harder • Defeats true loyalty MAANZ International 18
  19. 19. Negotiating Price • Do nots • 1. Do not start with the belief there are no options. • 2. Do not start with the price • 3. Do not start with a low price and then follow-up with a discount• 4. Do not create prices using only a cost based focus. MAANZ International 19
  20. 20. Negotiating Price • Do’s • Start with a value based concept – not a cost based one • Understand why buyers buy – It is always VALUE• Understand value from the customers point of view MAANZ International 20
  21. 21. Price Is A Creative VariableImplicit in the argument that price must reflect value is the need for flexibility in the methods used to establish prices. "price is a variable.” 10 MAANZ International 21
  22. 22. Price Is Just One Element Of Your Marketing Mix Pricing is but one of the four strategic elements comprising the marketing mix. If marketers are to meet consumer demand profitably, theycannot afford to reduce their relationships with their markets to simple price-quantity terms. MAANZ International 22
  23. 23. The main care must be to tailor prices to market requirements, and present them to those markets as integral parts of appealing composite offers and strategies. MAANZ International 23
  24. 24. The underlying reason for much of todays ineffective pricingis a preoccupation among those who set prices with the need to cover costs. MAANZ International 24
  25. 25. Costs and Buyer Evaluation • A fundamental principle in market-based strategic pricing is to recognise that price is a statement of value, not a statement of costs. One of the leading causes of new-productfailure is a phenomenon of "price crunch." This is the situation where the firm charges a price that is significantly higher or lower than the amount of value buyers associate with a particular purchase. MAANZ International 25
  26. 26. It is reasonable to accept the economic axiom that prices paid tell us something about consumer evaluations of products. (i) the traditional demand theorem that the lower the price, the greater the sales.(ii) the premium-pricing dictum: the higher the price, the higher the customer valuation - so, the greater the sales. MAANZ International 26
  27. 27. Why Do buyers Buy? MAANZ International 27
  28. 28. Understanding Buyers• 1. Not everyone is the same – that’s why we segment and target.• Understand the Price mind set (it affects both buyer and seller) • The value for some customers is in “out negotiating” you. They just want to win. MAANZ International 28
  29. 29. Value Buyers interest in price stems from their expectations about the usefulness of a product or the satisfaction that they may derive from it.Because buyers have limited resources, they must allocate their buying power so that they can obtain the most desired products. Buyers must decide whether the utility gained in an exchange is worth the buying power sacrificed. MAANZ International 29
  30. 30. Price And Value A fundamental principle in market-based pricing is torecognise that price is a statement of value, not a statement of costs. MAANZ International 30
  31. 31. Best Value. The best value is the one that provides the most benefit (interms of the customers desired set of attributes) for the least price.Value represents a buyers overall evaluation of the utility of aproduct based on perceptions of the net benefits received and what must be given up. MAANZ International 31
  32. 32. The amount that an organisation charges is both a determinant and a reflection of the amount of value a buyer receives.Price determines value because the customer is comparing thebenefits gained to the price given up (e.g., value for the money). MAANZ International 32
  33. 33. Price also reflects or is a statement of value in that higher (orlower) prices should correspond with more (or less) valuable benefit packages. Value Is PerceptualA common mistake made by managers is to confuse actual and perceived value. MAANZ International 33
  34. 34. Product value, like product quality, has noclear meaning except in terms of the needs of particular customers. 44 MAANZ International 34
  35. 35. Buyers can encounter considerable difficulty when trying to assess value. Their judgements are biased and emotional.In addition, customers are usually looking at a combination of factors when judging value, some of that may be different from the factors considered important by managers. MAANZ International 35
  36. 36. Understand the Price Mind set • Everyone is doing it!• The market is shrinking and there are a lot of competitors using low price as their marketing tool. MAANZ International 36
  37. 37. Creating Customer ValueMany successful organisations have come to a fundamental realisation: The job of any market-driven organisation is not to sell a product, but instead to create value for customers. MAANZ International 37
  38. 38. Firms create value in many ways. In fact, the possibilities are virtually limitless. Improved quality, faster service, morecomprehensive warranties, unique features and options, better delivery, easier ordering, and a convenient location are but a few examples of sources of customer value. Value is created, then, through product benefits. Customers do not purchase a product per se. What they are actually buying is a set of need-satisfying benefits. 32 MAANZ International 38
  39. 39. The primary aim must be to offer products formed inconsonance with consumer demand, at prices compatible with consumer evaluations and corporate sales/profit objectives. Consumers value many other things apart from price. Competition never occurs only in terms of price. MAANZ International 39
  40. 40. Customers frequently do not purchase the item with thehighest quality, but they do tend to consider only those products that meet minimal quality standards.Further, some observers assume that quality is directlyassociated with price. That is, higher price serves as an indicator of higher quality. MAANZ International 40
  41. 41. Where buyers are confused about the attributes and performance capabilities of anitem, they will tend to use price as an indicator of quality. MAANZ International 41
  42. 42. Adding Value• Customer service as the potential success. Reward major customers for their loyalty • Try not to buy loyalty – earn it. • maybe movie tickets?• Maybe thank you letters to some smaller customers sometimes to make feel appreciated? MAANZ International 42
  43. 43. • For more information about MAANZ International and articles about Marketing, visit: • • • • . SmartaMarketing-Group-2650856/about • Email: • Link to this site - - for further presentations MAANZ International 43
  44. 44. ENDMAANZ International 44