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Posts Tagged ‘B2b’

Exam survival kit: revision posters

In Management, Marketing on May 1, 2013 at 2:24 pm

Books_01

Revision is a bore. But knowing where to begin brings you a long way towards exam success. HBR has thrown together 4 examples of how to separate the main themes and topics of a module, while developing your overall view of the marketing and management disciplines.

HBS revision 001

HBS revision 003

HBS revision 002

HBS revision 004

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Global pricing: standardisation v. adaptation

In Management on April 18, 2013 at 4:38 pm

currencies

HBR has previously explored the impact of competition, product and demand on the pricing strategies of businesses. In this article, we build on this by looking at the pricing in the global context. Largely, MNEs have to adapt prices to account for local conditions. This includes factors relating to the customers, product and market.

Customer

The golden rule of standardisation extends to pricing. If prices can be extended across regional markets, multinationals reduce the complexity of marketing and their organisational structure.

In the pursuit of standardised prices, psychologists have worked with marketers to establish pricing techniques which are effective in raising sales across cultures. Bundled prices, along with ‘99p’ selling, subscription and discounting models, can make a market offering appear more attractive to buyers. However, pricing is always designed to befit the business – by encouraging rapid or widespread adoption, securing a return on capital expenditure or by positioning the organisation in the market.

Bundling is most often used to justify a higher profit margin while lowering buyers’ willingness to negotiate. For these reasons, EasyJet has become adept at building relationships with local hotels and car hire companies – using holiday packages to maintain competitive flight prices.

The elasticity of demand restricts the price range of a good and can lead businesses to interesting strategies. As the recession set in during the first decade of the 21st century, Starbucks was losing customers. Against conventional advice, the coffee chain benefitted from an 8% price rise. This is because, with the departure of price sensitive customers, Starbucks was left with inelastic demand. Instead of regaining customers, Starbucks extracted more value from their surviving base.

Product

The exclusivity and representational value of a product both impacts and is impacted by its attached price tag. Firms in luxury product segments, from LVMH’s bags to Cartier watches, use fixed prices to added representational value to products which stand for membership of a global elite. On the other side of the spectrum, Ironman marathon runners protested expensive membership schemes as antithetical to the ethos of the sport.

Covering costs is a central objective of pricing strategies, and is established by product specifications. Cost pricing provides the benefits of achieving return on investment, but needs to be set with a determined recovery period. For instance, GlaxoSmithKline’s pharmaceuticals command high premiums so that they might recoup development costs before the drugs become commoditised.

Market

Geocentric strategies have been developed to balance local conditions with the risk of pricing arbitrage. They consider the different levels of wealth and development across global markets. Correspondingly, prices vary even within clustered economies. In terms of consumer prices, Demark is 42% higher than the average EU state, whereas Bulgaria is 49% below the average.

Market pricing relies on market forces to set price levels. This enables companies to maintain their positions through fluctuations in demand, but can result in a lack of differentiation between market offers. Due to this pricing method, the competition between Swedish food retailers was unresolved through the 2000s.

Companies might otherwise be obliged to adapt price because of legal requirements, exchange rate fluctuations or opportunities for counter-trade as in BAE Systems’ arrangement with Saudi Arabia.

Conclusion

International pricing strategies can successfully have standardised features, such as promotional reductions, and be rooted in the same orientation – cost, market or value. However, the level of maturity and currency used in a national market will determine the relative prices at which a product can be expected to be embraced by a local customer base.

Pricing strategy in B2B markets: Demand (1/3)

In Informatics, Management on April 16, 2013 at 3:50 pm

1956_The Price is Right

The price is right

Price is an essential component of marketing and revenue generation which cuts to the heart of the purpose of modern enterprise. Businesses address customer needs through the provision of goods and services. However, this is not an end to itself. Primarily, firms exist to increase the wealth of their owners. To do this they engage in revenue and profit generating activities.

Revenue = price of good x quantity of good sold

Profit = total revenue – total costs

The profitability of a business can be increased by selling more, decreasing costs or raising prices. Although most obviously involved in the latter option, price strategy is an element of all of these methods. Enterprises can alter price to maximise profits, penetrate or skim markets, reduce inventories or encourage up- or cross-selling. Typical objectives include getting a return on investment and increase market share.

Businesses do not operate in a vacuum, however. Only certain pricing decisions will be viable for any one market situation. This article separates the relevant factors into demand, product and competitive conditions.

Demand

In neoclassical economics, lowering prices increases demand and adding to buyer costs reduce the number of potential customers willing to buy. However, more sophisticated models differentiate between inelastic and elastic demand.

Price elasticity refers to the percentage change in the quantity of a good demanded resulting from a 1% price change. If demand is inelastic, price alterations have a rapid effect. On the other hand, customers who are slow to be discouraged from buying as prices increase demonstrate elastic demand. The second scenario occurs when a product cannot be easily substituted or provides value through high quality. Similarly, buyers who are not attentive spenders or find searching for lower prices challenging are flexible in the prices they will pay.

CONTINUED IN PART 2.

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.

Pricing strategy in B2B markets: competition (3/3)

In Management on April 16, 2013 at 3:43 pm

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Competition

Exclusivity is an element of value. Businesses without competition enjoy markets with inelastic demand conditions and can price accordingly.

Industrial component manufacturer, Parker Hannifin was able to transform its fortunes by establishing five categories of products, priced according to value. These included A items which were bought at high quantities in competitive markets and B items which were differentiated to add value. At the other end of the scale, items which were exclusively sold by Parker in the E category commanded high prices.

One of the most extreme effects of competition on price can be in price wars where firms repeatedly cut their prices in an attempt to win market share. Oftentimes, this is unsustainable and is only advisable if your business is starting from a position with a substantial cost advantage or if market share growth is clearly prioritised regardless of profitability concerns.

Conclusion

Price strategies offer tempting routes to competitive advantage. Not only does pricing clearly affect the profitability of sales, but it its easier and quicker to change than other areas of the marketing mix. However, pricing alterations should be adopted to achieve long term growth, not as a short term fix. This involves considering market conditions, including demand, product and competitive factors. Just as the customer considers the value of their purchase, so should business leaders evaluate pricing options. Costs must be justified by the benefits received in return.