Price, Cost and Value in Business Markets Overview
Pricing importance! IF OTHER ASPECTS OF MARKETING STRATEGY ARE SOUND, BUT PRICING POLICY IS FLAWED THEN A COMPANY MAY FAIL.
The Problems of Pricing• Business marketers may have to negotiate individually with each customer.• They may to work to a fixed specification that includes price.• They may have long-term contracts that specify that the price reduces each year.• They may not be able to identify their actual costs.• They have to estimate the customers full costs.• They must also think about the value of his customer relationship.
ProfitCOMES BY PROVIDING A SOLUTION FOR ACUSTOMER’S PROBLEM AT A PRICE THAT EXCEEDSTHE SUPPLIER’S COSTS.
But!!!!• The value of a solution varies for each customer.• Customers often find it hard to judge value.• Problems vary in difficulty and costs vary accordingly.• Customers may not appreciate this or pay for it.• The difficulty of solving a problem depends on the customers skills.• Minor changes in an offering may have a dramatic effect on supplier’s costs.• Customers may value some relationships differently from others.
The price that the customer is prepared to paywill depend on: • The importance of the problem of the customer. • The extent to which the offering provides a solution to its problem. • The value to the customer of its relationship with the supplier. • The total costs that the customer must incur in order to obtain the solution. • The number and characteristics of alternative suppliers and offerings.
Pricing skills for the business marketer • To identify the problems of different customers. • To assess the price and other costs that each customer is prepared to incur. • To choose which customers and which of their problems it will attempt to solve. • To develop an offering within its own cost structure and the price the customer is prepared to pay. • To manage the process of fulfilling the offering so as to ensure that received price exceeds costs.
Pricing for simple customer problems • Customer will have no need uncertainty. • Customer has no market uncertainty. • Main concern is its transaction uncertainty. • Supplier must compete by reliably providing a fixed offering at the lowest price. • Profit will depend on its transfer abilities.
Pricing for complex customerproblems • It may be difficult for a customer to identify a suitable solution. • It may also be difficult for a potential supplier to immediately provide an offering. • Solution may require adaptations by both the customer and supplier. • Solution requires complex relationship.
Pricing for complex customer problems(continued) • Both customer and supplier find it difficult to identify costs of solving the problem. • If there is no relationship there is no relationship then the supplier will have to develop one. • The supplier will need to include costs and risks of relationship building and adaptations in pricing calculations.
This depends on: • The costs of solving the problem. • The likely revenue. • The effects of solving it on this and other relationships. • The effects on the relationship of not solving it, or of failing to solve it.
Value Assessment MethodsValue Assessment: work process of obtaining an estimate of the worth in monetary terms of some present or proposed market offerings or elements of it. Business Market Management, 3rd edition 14
Value Assessment Methods Internal Focus Group Engineering Benchmarks Value Assessment Assessment Field Value-in Use Direct Survey Compositional Assessment Questions Approach Indirect Survey Conjoint Analysis Importance Rating Questions Business Market Management, 3rd edition 15
Customer Value ManagementGoals:1. Deliver superior value to targeted market segments and customer firms2. Get an equitable return on the value delivered To gain an equitable return on value, suppliers must be able to persuasively demonstrate and document superior value relative to next-best alternative 16
Customer Value Workshop 1. List all the elements for the marketing offering under consideration 2. Write a list of value elements, in a quick fashion, drawing on collective experience. 3. What are the next best alternative offerings in the minds of the customer for all segments to be investigated. 4. Apply the value equation
Customer Value Workshop Product Solution Example: High end photo copier (cost saving) Paper Jam Cost Savings B, A = [(paper jambs per day x (Valuef – Pricef ) > (Valuea – Pricea ) minutes to fix jam) A - (paper jams per day x minutes to fix (Valuef – Valuea) > (Pricef – Pricea ) jam)B ] / 60 minutes per hour x operator wages per hour x annual work days Valuef, a > (Pricef – Pricea ) Paper Jam Cost Savings B, A = [(3 x 10)A – (1 x10)B ] /60 x $31.82 x 240 = $2,545.60 Business Market Management, 3rd edition -18
Customer Value Workshop Product Solution Example: 3M Abrasive Disks used by auto panel beaters. (cost saving) Auto Repair Cost Savings B, A = [(discs used per day x minutes to (Valuef – Pricef ) > (Valuea – Pricea ) change disc on sander) A - (discs used per day x minutes to fix disc on sander)B ] / 60 minutes per hour (Valuef – Valuea) > (Pricef – Pricea ) x operator wages per hour x annual work days Valuef, a > (Pricef – Pricea ) Auto Repair Cost Saving B, A = [(50 x 5)A – (30 x5)B ] /60 x $35 x 240 = $14,000 Business Market Management, 3rd edition -19
Summary • Price is only one of the customer costs. • The offering and the relationship have value to the customer and the supplier. • A Supplier costs are not limited to those of producing and delivering its offering. • A marketer must have accurate and timely information on costs and revenue.
Summary • A marketer must control discounts. • The marketer must tailor price to customer views and problems. • The marketer must standardise price wherever possible. • Use value assessment and tailored pricing methods to demonstrate customer value,
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