This document provides an overview of industrial pricing strategies and policies. It discusses key factors that influence industrial pricing decisions such as pricing objectives, demand analysis, cost analysis, and competitive analysis. It then examines various pricing strategies across different stages of the product lifecycle and for different types of customers. Specific pricing policies like trade discounts, quantity discounts, and cash discounts are also explained. Commercial terms and conditions prevalent in industrial markets are briefly outlined.

1. Bachelor of Science ( Special ) Marketing Management
Third Year First Semester
Industrial Marketing : MM3133
Industrial Pricing Strategies
and
Policies
Hand out No: 07

2. Prepared By:
M.P.D.S.Ananda
10/MS/004
Department of Marketing Management
Faculty of Management Studies
Sabaragamuwa University
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3. Learning Objectives
1. To explain the special meaning of price in industrial
marketing.
2. To discuss the factors that in influence industrial pricing
decision.
3. To understand about pricing strategies for different product
and decision.
4. To examine the pricing policies for various types of
customers.
5. To analyze the commercial terms and conditions prevailing in
the industrial markets.
6. To explicate the role of leasing in industrial market.
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4. Special meaning of price
When the industrial buying firm buys a product from XYZ
supplier firm which is in competition with several other
suppliers of the similar product, it means that the buying firm
perceives that XYZ supplier offered the highest delivered value.
The highest delivered value is the difference between the overall
perception of value and the total cost to the buying firm.
The overall perception of value (or the benefits) will vary in
degrees of importance to the different individuals within the
buying committee(or the buying center) of a buying firm.
The total cost to the buying firm includes not only the price of
the product, but also transportation cost, transit insurance cost,
and installation cost.
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5. Factors that influence pricing decisions
Industrial marketing firms have to consider following factors
in its pricing decision.
1) Pricing objectives
2) Demand analysis
3) Cost analysis
4) Competitive analysis
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6. 1. Pricing Objectives
Pricing objectives should be derived from corporate and
marketing objectives.
This is most important factor in pricing decision.
Some of these objectives:
• Survival
• Maximum short-term profit
• Maximum short-term sales
• Maximum sales growth(or market penetration)
• Maximum market skimming.
• Product quality leadership
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7.  Survival
• Profits are less important than survival. Such companies
define their prices in a way that they can cover variable
costs and part of fixed costs so that the can survive.
• This is done for a short term and they need to increase the
prices because they have to cover total costs to face losses.
 Maximum short-term profits
• A firm attempts to maximize its short term profits.
• Companies following this objective select the price that
yields the maximum current profits.
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8.  Maximum short-term sales
• Focuses upon maximizing short-term revenue. Through this,
companies expect to acquire growth and market share.
 Maximum Sales Growth (Market Penetration)
• Some companies fix prices of commodities as low as possible with
the objective of maximizing sales volume & market share of it’s
products.
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.
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9.  Maximum market skimming
Some companies fix higher prices in the initial stage of product
life cycle when they introduce new and innovative products.
By this objective, the company skims maximum revenue and
profits.
The assumption: different prices can be charged to different
segments of customers and also at differentiate times.
The risk involved is that high profits resulting from high prices,
will attract entry of competitors.
 Product quality leadership
 The aim is to produce superior quality products more than rivals.
 A firm following this will charge a price which is slightly higher
than the competitors’ prices
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10. Other Pricing objectives
Between two extremes of market skimming & market
penetration, there is an intermediate range of moderate pricing
alternatives.
Objectives achieved are,
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Be regarded fair by customers
 Avoid government intervention
 Try to stabilize the market
 Meeting the competition

11. Demand Analysis
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 for price elasticity of demand
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Price elasticity of demand = percentage change in quantity demanded
percentage change in price

12. Cost benefit analysis
For an appropriate pricing strategy an analysis of the
benefits and the cost of the product from the customers point of
view is necessary. benefits can be categorize in to hard and soft
benefits.
1. Hard benefits
The Physical attributes of the product such as production
rate of a machine, rejection rate of a component, price ratio
Ex: price ratio for computers can be rupees per unit of
processing speed
2. Soft benefits
Company reputation, customer service, warranty period,
customer training, and are more difficult to assess.
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13. 3. Cost analysis
• When we make a pricing strategy, costs involved should
be considered.
• Total cost include the sum of fixed costs and variable
costs for a given level of production.
• For making profitable pricing decisions, the industrial
marketer must identify and classify costs.
• They can be shown in the following table.
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14. Classification of costs
Cost elements Descriptions
Fixed costs
(also known as overheads)
Costs that do not vary with production or
sales. Examples are rent, interest charges, and
managerial salaries. Fixed costs or overheads
are incurred irrespective of production levels
or sales volume.
Variable costs Costs that vary (or fluctuate) in direct
proportion to the levels of production.
Examples are raw materials and direct labor
costs. They are called variable because the
total variable cost varies with the number of
units produced.
Total costs Sum of the fixed and variable costs for any
given level of production is called fixed costs.
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15. Semi variable costs Costs that vary with changes in output but not
in direct proportion to quantities produced.
Example are equipment repair and maintenance
costs.t his cost have components of fixed and
variable costs.
Direct costs Fixed or variable costs that are incurred
directly for a specific product or sales territory.
Examples are selling expenses, freight and raw
material.
Indirect costs Fixed or variable costs that can be traced
indirectly to sales territory or a product.
Examples are production overhead and quality
control that are indirectly assigned to a product.
Allocated costs /general costs Costs that support a number of activities. these
costs allocated across business groups or
divisions by some arbitrary criterion.
Examples are administrative overhead &
corporate advertising.
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16. An industrial marketer must understand:
• The costs vary at different levels of production and
economies of scale can be planned.
• Accumulated experience helps in reduction of costs
• The effect of break-even analysis on costs and sales
volume.
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17. I. Cost behavior at different production levels -
economies of scale
Companies should know how its costs very with different levels
of production in order to set prices in appropriate way.
Sometimes, some companies may use economies of scale by
building a larger plant size to compete effectively.
200100 300 400
300
200
100
Quantity Produced per Year(in thousand Numbers)
Cost per unit(in RS)
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18. II. The learning curve
• This means, when some cumulative volume of production
increases, certain costs decline.
• This is also called as Experience Curve.
• The major impact of cost reduction takes place in variable costs
although the fixes cost can also be reduces to some extent.
63 9 12
300
200
100
Accumulated Production (in Hundred Thousands of Numbers
Average Cost per unit(in Rs)
' '---------------
------------
15 180
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19. III. Break –Even Analysis
It is a financial technique which is used by the marketer to
consider different prices and their possible effects on sales
volumes and profits.
Break even volume= fixed costs
selling price- variable cost
The company should also consider lowering its fixed and variable
costs by using economies of scale and learning curve concept.
Bringing down the costs will further lower the break- even
volumes and improve profits.
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20. Competitive analysis
• Many industrial marketers regard competitive-level pricing
as the most important pricing strategy.
• Industrial firm should get the information on not only
competitors prices and costs but also about the
competitor’s product information.
• If a firms product quality is superior to all it’s competitors
and its service is equally good, it can price its product
higher than its competitors.
• If the products and services similar to the major
competitor, its price should close to the competitors price.
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21. Reaction Reason for that reaction
Do not react strongly or quickly to a
price change.
Slowness in noticing the price change.
Confident of their customer loyalty.
React in selective manner React only if price change is large.
React strongly and quickly. They react any attack. Fight to finish
Unpredictable Based on fast behavior, financial
situations, objectives.
Competitors response to price change
A competitor’s response depends on its mind-set.to
understand the
competitor’s mind-set ,an industrial marketers must study the
business philosophy, internal culture, and the past practices
of the competing firm.
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22. The pricing strategies
• This is the next step after considering the major factors that
influence pricing decisions.
• we will consider the pricing strategies for the following
situations.
I. competitive bidding in competitive market
II. Pricing new products
III. Pricing across the product life cycle
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23. Competitive bidding.
Selling to government undertakings and public sector
companies.
Competitive bidding can be either closed or open.
Strategy for competitive bidding
Commonly used strategy is probabilistic bidding.
It makes two assumptions,
1. The pricing objective is profit maximization.
2. The buying organization will decide the order on the
lowest price bidder.
Three variables are used,
1. Amount or price of the bid
2. Expected profit if the bid price is accepted
3. Decide the order on the lowest price bidder.
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24. In closed bidding, the government or public sector buyer invites the
potential suppliers through newspaper tender notices to submit written
sealed bids.
In open bidding ,the buyer asks the potential suppliers to submit bids.
this method is generally followed by commercial enterprises in
private sector.
An industrial marketer tries to seek an optimum trade off between
the bid price or profit. It is shown by following equation.
E(A)= O(A)* T(A),
Where,
A= bid price in rupees
E(A)= expected profit at bid prices A
P(A)= probability of acceptance of its bid price A is accepted
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25. Pricing new products
There are two pricing strategies available for a new product which
is in the introductory stage of its life cycle. There are :
1.Skimming (high initial price) strategy
2.Penetration (low initial price) strategy
1.Skimming strategy is used for a distinctly new product which is to
purchased by a market segment that is not sensitive to the initial high
price.
2.penetration strategy is effective when ,price elasticity of demand
is high or buyers are highly price sensitive.
- strong threat exists from potential competitors
- opportunity exists to reduce the unit cost of production and
distribution with increase in volumes.
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26. Pricing across product life-cycle .
1. Growth stage pricing strategy-
In the growing market, the industrial marketer tends to focus on product
differentiation Product line extension and building new market segment.
Industrial buyers follow the purchasing policy of developing more than
one supplier as more suppliers enter to the market.
Thus innovator firms decide lower price.
2. Maturity stage pricing strategy
In the maturity stage of the product ,the competitors are well-
entrenched and aggressive.to increase sales volume, the marketer has
to cut into the competitors’ market share. to increase sales volume,
the marketer has to cut into the competitors’ market share. This can
be achieved by adopting the pricing strategy of lowering the price to
match the competitors’ prices.
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27. 3. Decline stage pricing strategy
if the company has built a reputation of good product
quality and dependable services, it need not cut the price but
reduce the costs to earn some profits.
another strategy is to cut the price to increase sales
volume above break even volume and use product to help sell
other products in the product mix.
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28. Pricing policies
Industrial marketers deal with different types of customers
( users, OEMs, dealers) who buy in various quantities and are
located in various geographical locations.to account for these
differences, pricing policies are evolved to adjust the base price,
of a product. industrial marketing firms set a price structure that
covers different product items which describe different sizes and
specifications of a product.
Ex: electric motor is a product with different horse power or
kilowatt ratings ,with different speeds, different enclosures and
different applications.
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29. Trade discounts
As the name suggests, the trade discounts are offered to the trade, that
is intermediaries ( middlemen) such as dealers and distributors. the
amount of trade discount depends on the particular industry norms or
the functions performed by the intermediaries.
List price( base price)
This is also called as price list. This is a basic price of a
product consisting various sizes or specifications. It is the published
statement of basic prices which is sometimes distributed to the
customers.
Net price is worked out based on list price less discounts or
any other concessions.
Net price= List price- discounts
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30. Quantity discounts
This is offered to industrial customers who buy large volumes.it is a
price reduction given by subtracting the volume discount from the
list price.
The purpose of quantity discount is to encourage customers to buy
larger quantities and to maintain their loyalty. The decision on the
quantum of quantity depends o demand, costs and competition
analysis.
Cash discount
It is common in industrial market to offer cash discounts to
customers with the objective of getting prompt payments.it is a
discount applicable on the gross amount (ex: basic price plus excise
duty plus sales tax) of the bill, provided the customers pays the bill
with in the stipulated period(of say 7 or 10 days) from the date of
invoice.
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31. Geographical pricing
This is about how to price the products to customers In different
geographic locations. in geographical pricing, there are generally two
methods of price basis which are stated in the offers or quotation
submitted by a seller to a buyer.
Ex- factory and FOR destination.
i. Ex- factory:
This means that the freight and transit insurance costs are to the
buyer’s account. The seller will charge the costs of freight and insurance
to the buyer. This Is called as the prices prevailing at the factory gate.
ii. FOR Destination or FOB destination
This means the freight costs are absorbed by the seller or
included in the quoted prices.
Taxes and levies
industrial marketer needs the knowledge of tax. Sometimes,
businesses are won or lost due to different levels of central and state sales
taxes.
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32. Commercial Terms And Conditions In Industrial
Markets
It is important for sales/ marketing persons to have knowledge and
understanding of commercial matters at the time of preparation of
bids (quotations) and while negotiating with industrial customers.
Terms of payment
- direct payment
- payments through bank
- 95/5 or 98/2 percent payment terms
- bank guarantees
- price basis
- LD/ penalty
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33. 1.Direct payment
Credit is normally offered to a customers who is a good paymaster or
credit –worthy. the good are dispatched directly to the customer and the
bill or invoice is sent to the customer along with other documents such
as invoice- cum excise gate pass (for excisable goods),delivery challah,
inspection(work test) certificate and consignee copy of lorry receipt
(LR) or rail receipt(RR). A seller may allow 10,15,30,45,60,or 90 days’
direct credit to a buyer, depending on the agreement between the seller
and buyer .however ,this is not considered as a secured or safe payment
terms.
2.Payments through bank
There are different types:
- LC (Letter of credit )
- DA (documents on acceptance)
- DP (documents against payment)
Whenever payments are through bank, with LC, DA, or DP terms, the
supplier routes the bill and other documents through the bank.
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34. 4.Bank guarantees
Some industrial customers ,particularly the government undertakings,
ask suppliers to furnish bank guarantees (BG) towards the security
deposit for the fulfillment of the contracts.
3.95/5 or 98/2 percent payment terms
These terms are used by government organizations.
5.Price basis
The prices for industrial products are quoted excluding excise duty,
sales tax or any other government duties.
6.Ld / Penalty
when a buyer mentions in the enquiry that “ the delivery is the
essence of the order/ contract” it means that legally the supplier is
bound to meet the delivery period mentioned in the order/contract.
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35. Role of leasing
A lease is a contract through which the assets owner extends the
right to use the assets to another party in returns for periodic
payment of rent over a specified period.
lease versus purchase
industrial buyers examine the cost/benefit trade-off of
alternatives of buying versus leasing. The benefit of leasing are
conserving capital, gaining tax advantages, and getting the latest
products. The cost of leasing includes the lease payment and
sacrifice of asset’s salvage value.
Types of leases
There are two types of leases:
- Financial (or full- payment) leases
- Operating (or service or rental) leases.
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36. 1.Financial leases
These are non- cancellable, long-term agreements or contracts
and are fully a mortize. The sum of the lease payments over the
contract period equal or exceed the original purchase price of the
capital item. The buyer is generally responsible for operating and
maintenance expenses.
2.Operating Leases
In contrast, these are cancellable ,short term agreements or
contracts, and not fully amortized. Because the asset is provided for a
short period, the purchase option is not included.
Pricing Strategy
Pricing strategy could be decided out of the possible 3 alternatives.
I. Decide lease rate to favor leasing
II. Decide lease rate to favor outright purchase
III. Achieve the balance between lease rate and sales rate
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37. Pricing strategies
Depending on the marketing objectives of the firm, the pricing
strategy could be decided out of the possible three alternatives:
- decide lease rate to favor leasing
- Decide the lease rate to favor outright purchase
- Achieve the balance between lease rate and sale rate.
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38. Thank you
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