By students, for students.

Pricing strategy in B2B markets: Product factors (2/3)

In Management on April 16, 2013 at 3:47 pm

Price target

Product

Analysing demand elasticity soon reveals that product and market factors enable or constrict businesses in setting prices. At the most basic level, the cost of producing a market offering usually needs to be covered by its selling price. Businesses aiming to achieve a certain rate of return will price to gain a percentage of profit in addition to covering costs of production.

Cost based prices are easy to administer and use in forecasts, but come with several drawbacks. Firstly, the rationale of this pricing system (price = costs + profit %) means that cost reductions do not increase the profitability of the sale of individual units. Further, companies risk missing opportunities to profit by selling products and services at a level below the maximum customers would be willing to pay.

Evidently, a more satisfying pricing structure would consider both product and demand conditions. Value pricing addresses this desire by considering the buyer side of the buyer-seller relationship. Buyer value (the worth of an object or condition, relative to competing offerings) is measured by weighing the costs incurred and benefits gained through the purchase of a good or service.

Customer perceived value = perceived benefits / perceived costs

According to theory of wealth maximisation, a consumer will choose the good or service which they believe provides the most favourable benefit to costs ratio. Perceived benefits include physical attributes, service attributes, associated prestige and technical support. Costs consist of purchase price, opportunity costs, risk of failure and other sacrifices made in the exchange. Companies create differential advantage based on superior benefits and/or costs.

A value pricing strategy charges in line with customers’ assessments of the benefits and costs promised by a purchase. This has the benefit of balancing considerations of customer goodwill with supplier profitability, and highlighting product lines which do not adequately meet the needs of a market.

Value pricing also considers external changes, such as the product lifecycle. A business producing a new product to address nascent consumer demand might opt for high initial prices to engage in ‘time segmentation’. ‘Time segmentation’ involves tailoring product offers to extract value from each stage of the product life cycle. In pricing this typically means using high initial prices to maximise profits from the inelastic demand in early adopter segments before reducing buyer costs for a more mainstream appeal and finally inventory reduction as the product becomes obsolete.

CONTINUED IN PART 3.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: