Pricing of Industrial Products

The industrial marketers should understand the various aspects of the  pricing, since pricing is the most critical part of industrial marketing strategy.  Different strategies such as market segmentation strategy, product strategy, and  promotion strategy are related to pricing strategy. In order to achieve the dual  objective such as to meet the company objective and satisfy the market needs,  the industrial marketer has to integrate the various strategies.  When the members of buying committee of a buying firm, purchase a particular  industrial product, they are buying a given level of technical service, product  quality, and delivery reliability. The other elements such as the reputation of the  supplier, friendship, a feeling of security and other personal benefits flowing  from the buyer-seller relationship are also important. The bundle of attributes expecting by the buying committee  are fall under three categories. (1) Product specific attributes (2) Company  related attributes and (3) Sales personal related attributes. Therefore, the total  product includes much more than its physical attributes. In the same way the  cost of industrial products includes much more than the seller’s price. Hence,  decisions on pricing and products are inseparable and must be balanced with in  the firm’s market segmentation plan.

Characteristics of Industrial Prices

  1. Price is not an independent variable. It is intertwined with product promotion  and distribution strategies.
  2. The real price an industrial customer pays is quite different from the list  price; this is because of the factors like delivery and installation cost, training  cost, discounts, financing cost, trade in allowances etc.
  3. By changing the quantity of goods & services provided by the seller,  changing the premiums and discounts that are offered, changing the time and  place of payment and also in numerous other ways prices can be changed.  Compare to product and distribution decisions, the decision regarding pricing is  more flexible.
  4. The complimentary and substitute product sold by the same company should  be considered at the time of deciding price for industrial goods.
  5. Prices can be resolved through negotiation in many a cases. In most of the  cases the industrial prices are established by competitive bidding on a project by  project basis.
  6. Industrial buyers who are experienced and able to estimate the vendors approximate production costs expect the increasing price to be justifiable on the  basis of either increasing cost or improvement in product. Hence, industrial  pricing is often characterized by an emphasis on fairness.
  7. Industrial prices are affected by several economic factors such as inflation,  change in interest rates, fluctuation in exchange rates etc. This problem is  particularly critical for the marketer locked into long term contract with no  escalation clause.

Industrial Pricing Objectives

The objectives of industrial pricing should be derived from the  firm’s marketing and corporate objectives. Some of the pricing objectives which industrial firms can pursue are discussed below.

  1. Survival: Survival is one of the short term objectives for many industrial  companies. Due to intense competition and other reasons the firm may be  unable to sell its products. For the survival of the firm it reduces the prices to  convert the inventory into sales. The survival is more important than prices.  The prices are fixed in such a way that they cover variable cost and a part of  fixed cost so that the company continues in business. Survival is only a short  term pricing objective and in the long run the firm must increase its prices to  cover total cost and end up with some profits.
  2. Maximum short term sales: To maximize the sales revenue in the short run  is the pricing objective for some firms. The belief behind such an objective is  that by maximizing sales revenue in the short run the firms will have growth in  terms of market share and also have profit maximization.
  3. Maximum short term profits: Setting prices with the objective of  maximization of profit in the short run may be pricing objective of some of the  marketing firms. These firms estimate the market demand and costs at  alternative prices and select the price that maximizes the present profits.  Estimating demand and cost is very difficult. This objective emphasizes on  short term profit maximization rather than long term performance and customer  relationships. The competitors reactions and legal implications are not  considered by the companies adopting this objective.
  4. Market penetration: Based on the assumption that the market is price  sensitive and that the low prices will increase sales; the prices of products are  fixed as low as possible by some firms with the objective of maximizing sales  volume and market share of its products. The other assumptions underlying are  low prices will discourage entry of potential competitors and highest volume  will reduce the production and distribution cost and leads to higher profits in the  long run.
  5. Maximum market skimming: In the initial stages of the product life cycle  high prices are fixed by some firms when they introduce new and innovative  products. The new product is initially aimed at those market segments where  demand is least sensitive to price. The firm skims maximum revenue and profits  by adopting the skimming objective of pricing. The prices are lowered as the  time passes and sales slow down to attract new customers from price sensitive  market segments. To maximize sales revenue and profits is the objective in  market skimming. The assumption made in this strategy is that different prices  can be charged to different segments of customers at different times. There is  also a possibility that the competitors will be attracted because of high profits  resulting from high prices in this strategy.
  6. Product-quality Leadership: By producing superior quality products and  charging little higher prices than the competitors price the industrial marketing  firm may have an objective to be product quality leader in the market. This  pricing objective results in higher profits.
  7. Other pricing objectives: The other pricing objectives such as to meet or  prevent the competition, to stabilize the market, to avoid government  intervention etc. may be considered as objectives of pricing by many industrial  marketers.

Demand Analysis

The concepts of demand curve and price elasticity are  very useful in understanding the relationship between demand or sales volume  and price. In measuring the price and demand relationship, the other factors like  promotion and customer service should be controlled since these factors also  affect the demand. The basic purpose of estimating demand curve is to  determine the extent of change in demand for a product with the change in  prices. The price sensitivities of many buyers will be summed up in demand  curve. The demand curve indicates the degree of price sensitivity.  The demand is inelastic if it changes very less with a small change in price and  the demand is elastic if it changes substantially with a small change in price.  The following formula is helpful in determining the price elasticity of demand:

Price elasticity of demand =  Percentage change in quantity demanded /  Percentage change in Price

The industrial demand is likely to  be inelastic under the following conditions:

  1. There are few competitors
  2. Non availability of substitute products from other industries; and/or
  3. The buyers think the higher prices are justified by normal inflations or  changes in government policies on excise duty or sales tax and other.
  4. Since the industrial products are technically sophisticated, the demand for these  products is relatively inelastic.

Competitive Analysis

Competitive level pricing is considered as an  important pricing strategy used by many industrial marketers for the purpose of pricing of industrial products. The information on  product quality, technical expertise, and delivery performance of the competitor  should be analyzed along with the price and cost information. The information  on the product quality, prices and delivery performance of the competitor’s  product can be obtained by the industrial marketer through his sales force. By  appointing a marketing research firm the industrial marketer can get the  competitors information. Based on the available information about the  competitors the industrial marketer can use price as a mechanism to position the  product. The industrial marketer is considering a change in price he has to  forecast the reactions of competitors and customers. An industrial marketer  must study the actual sales, costs corporate objectives, financial situations,  utilization of production capacity and strengths and weaknesses. The reactions  of the competitors should be anticipated soon after collecting the information on  competitors. A competitor’s response depends on his mindset. The competitors  are likely to respond when the number of industrial buyers is less, the buyers are  aware of price change and the products are similar.

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