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Benefits of a Particular Product

Average competitor fights for niches along a common ratio of price and value (you get what you pay for) innovative firms can enter the market by providing better value to the customer (You get more than what you pay for)

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Benefits of a Particular Product

What they are looking for: Quality, service, delivery, reliability etc. Other elements are Reputation of the supplier, a feeling of security, friendship, and may be personal benefits. Value represents a trade off between benefits and sacrifices. Benefits are core benefits and add-on benefits (flexibility, accommodative to unique business needs, commitments, investing in relationships, tolerant to buyers mistakes). Sacrifices are acquisition, processing and Usage costs
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Benefits of a Particular Product

Functional benefits are the design characteristics that might be attractive to technical personnel. Operational benefits are durability and reliability, qualities desirable to production managers. Financial benefits are favorable terms and opportunities for cost savings, important to purchasing managers and controllers. Personal benefits are organizational status, reduced risk, and personal satisfaction.
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A broad perspective needed in examining the costs a particular alternative may present for the buyer. Rather than making a decision on the basis of price alone, organizational buyers emphasize the total cost in use of a particular product or service.

Customers Cost-in-Use Components

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There is no easy formula for pricing an industrial product or service. The decision is multidimensional. The each interactive variable assumes significance.

Key Components of the Industrial Pricing Process

Fig. 15.2

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Price Objectives
The pricing decision must be based on objectives congruent with marketing and overall corporate objectives. The marketer starts with principal objectives and adds collateral pricing goals: 1. Achieving a target return on investment, 2. Achieving a market-share goal, 3. Meeting competition.

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Price Objectives
Like Dow Chemical focuses first on pricing low margin commodity goods to build a dominant market share and then on maintaining that dominant market share. DuPonts strategy emphasizes higher margin specialty products. Initially priced higher and reduced later as the market share expands and competition intensifies.

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The equation highlights how the relative perceived values of two competing offerings are compared. The premium price differential, or perceived relative value, can be broken down into components based on each important attribute: 1. the value of the attribute to the buyer, 2. the perception of how competing offerings perform on that attribute.

Relative Perceived Value of Two Product Offerings

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Price Elasticity of Demand

The rate of percentage change in quantity demanded attributable to the percentage change in price. Factors of price elasticity, The ease with which customers can compare alternatives. The importance of the product in the cost structure. The value that the product represents to a customer.
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Target Costing

Target costing features a design-to-cost philosophy that begins by examining market conditions: Identifies and targets the most attractive market segments. Determines what level of quality and types of product attributes will be required to succeed.
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Cost Classification System Goals

1. Properly classify cost data into their fixed and variable components. 2. Properly link them to the activity causing them.

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Analysis of Cost Concepts

1. Direct traceable or attributable costs. 2. Indirect traceable costs. 3. General costs.

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Sources of the Experience Effect

1. Learning by doing.

2. Technological improvements.
3. Economies of scale.

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Selected Cost Comparison Issues: Followers Versus the Pioneer

Under certain conditions, followers into a market may confront lower initial costs than did the pioneer. By failing to recognize potential cost advantages of late entrants, the business marketer can dramatically overstate costs differences.
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Pricing New Products

Skimming Appropriate for a distinctly new product, provides the firm with an opportunity to profitably reach market segments that are not sensitive to the high initial price. Enables the marketer to capture early profits. Enables the innovator to recover high developmental costs more quickly. Penetration is appropriate when there is 1. High price elasticity of demand, 2. Strong threat of imminent competition, 3. Opportunity for a substantial reduction in production costs as volume expands.

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The Rules of Competitive Strategy

Never participate in a competitive engagement you cannot win. Always participate in competitive engagement from a position of advantage.

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The Rules of Competitive Strategy

Hypercompetitive rivalries: Blue ocean strategy vs. Red ocean strategy In the Stable environments firms strategy focused on sustaining its own strategic advantage and establishing equilibrium where less dominant firms accepts a secondary status. In a hypercompetitive environments successful companies pursue strategies that create temporary advantage and destroy the advantage of rivals by constantly disrupting the market equilibrium. Like Intel in Microprocessor industry and HP in Printer industry.

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Competitive Bidding
Closed bidding, often used by business and governmental buyers, involves a formal invitation to potential suppliers to submit written, sealed bids for a particular business opportunity. Open bidding is more informal and allows suppliers to make offers (oral and written) up to a certain date.

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