Industrial Pricing Strategies and Policies

2014
D.M. Sanath Dasanayaka (sanath.dasanayaka@yahoo.com)
University of Sabaragamuwa, Sri Lanka
Industrial Pricing
Strategies and Policies

By;
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Abstract
Fundamentally, this comprehensive article examines the significant factors that should be
taken into account before making industrial pricing strategies and policies, such as
pricing objectives, demand analysis, cost analysis and competitive analysis in depth. As
well as pricing strategies in competitive bidding, pricing strategies for new products and
Pricing throughout the product life cycle are expected to be discussed. Furthermore,
industrial pricing policies, such as list price, trade discounts, quantity discounts, cash
discounts and geographical pricing will be elaborated under this article.
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Content
1. Introductionto industrial pricing strategies and policies 03
2. The industrial Pricing Strategies 06
3. The industrial pricing policies 09
4. References 12
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1. Introduction to Industrial Pricing Strategies and Policies
Mainly, pricing in Industrial Marketing is very critical andvital as it is related with market
segmentation strategy, product strategy, distribution strategy, communication strategy and
promotion strategy.
Basically, here, the price is the amount of money that is paid to an industrial seller by an
industrial purchaser. As well as, there is a significant difference between the total costs to the
buying firm and the price. The total cost includes transportation cost of products, transit
insurance cost and installation cost as well as risks, such as product failure, the delays in
supply and lack of technical support other than the products price.
Sometimes, the products price decreases due to volume discounts (discounts on the volume
of purchase) and cash discounts (discounts upon the total expenses of purchasers).
Before deciding upon pricing strategies and policies, industrial sellers should make decisions
on pricing objectives, demand analysis, cost analysis and competitive analysis. Those
considerable factors are elaborated below.
1. Pricing Objectives
Pricing objectives should go according to the firms marketing strategies since the
organization is operating to realize marketing objectives through pricing objectives.
Different pricing objectives have different impacts on sales revenue, profits and
market share. Most basically, below pricing objectives are reviewed before deciding
upon pricing strategies.
Survival: A short-term objective which is taken into the implementation when the
organization is underutilizing its production capacity to a large extent or the firm
has a large unsold stock of products at its stores or there is an intense level of
competition in the market place. Here, the firm decreases product prices in order
to sustain in the market. In this way, they can cover variable cost and a part of
fixed cost. Although this objective ensures the organizations existence in the
short-run, it makes loses to the firm in the long-term.
Maximum short-term profits: In this case, a firm attempts to maximize its short-
term profits. Companies following this objective select the price that yields the
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maximum current profits. Those organizations usually do not consider of legal
implications and long-term customer relationships.
Maximum short-term sales: Focuses upon maximizing short-term revenue.
Through this, companies expect to acquire growth and market share.
Market penetration: Here, firms fix prices as low as possible with the aim of
getting a high sales volume and market share. In this, organizations believe that
high volume of sales will decrease production and distribution costs, and yield
high profits as well as keep competitors out of the market.
Maximum market skimming: Mainly, here, a firm sets a very high price in the
introduction phase of a new or innovative product aiming the market segments
which are least price sensitive. In this, a company is able to maximize revenue
and profits in a short period of time. But, in the long-term, the prices are brought
down to attract customers from price sensitive market segments. However, this
will attract competitors into the organizations market.
Product quality leadership: In this, the aim is to produce superior quality
products more than rivals. As well as, a firm following this will charge a price
which is slightly higher than the competitors prices. And this objective yields a
high level of returns.
2. Demand Analysis
In this, the relationship between sales volume and the elasticity of demand aretaken.
Mainly, the elasticity of demand means the price sensitivity of buyers or the change
in buying volume as a result to a change inthe price of acertain product. Basically,
here, pricing strategies are designed depending upon the elasticity of demand. There
are two types of elasticity of demand as,
Inelastic: Small change in demand relatively to the change in the price of the
product.
Elastic: Demand changes substantially with a small change in the products
price.
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Basically, the demand is less elastic when there are few rivals; there is an
unavailability of substitute goods and when purchasers think high prices are justified
due to changes in government policies upon duty and taxes.
But, the demand for most industrial products is inelastic since their technically
sophisticated, customized and significant for customers operations in their factories.
When developing a successful pricing strategy a firm should consider its products
costs that are incurred by customers and benefits received in the customers point of
view. Product benefits are identified as hard benefits (benefits related to the products
physical attributes, such as production rate of a machine, price/performance ratio and
rejection rate of a component), soft benefits (company reputation, customer service
warranty period and customer training).
After studying costs and benefits, a firm can make decisions on how customers
perceive its products and competitive offers. So, through this, the firm develops an
appropriate pricing strategy based on cost-benefit analysis.
3. Cost Analysis:
In deciding pricing strategies, a firm should consider about costs incurred in
production. The total costs consist of fixed costs (costs that do not change with the
production or sales, such as rent, interest charges and managerial salaries) and
variable costs (costs that change on the units of production like material and labor
costs) in production, marketing and distribution. To decide on pricing strategies,
firms should have a better understanding on the cost levels at each production level.
As well as, here, an organization should be aware of economies of scale well.
(Economies of scale: the total average cost per unit decreases when the production
volume increases. The logic behind this is the total average cost per unit reduces
since the total fixed costs spread over more units).
As well as, the average unit total cost of products decreases over a period of time
with the firms experience of manufacturing and marketing. This is known as the
experience curve.
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4. Competitive Analysis
Many industrial manufacturing and marketing organizations consider competitive-
level pricing a significant method. Here, they gather information on competitors
prices, product quality, delivery performance and technical expertise through asking
competitors customers or marketing surveys on competitors actions. By using
collected information on competitors, a firm can design its pricing policy
successfully. As an example, if a firms products equal to competitors products in
quality and delivery performance, the company is able to charge a superior price as
competitors do.
2. The Industrial Pricing Strategies
After considering the factors affecting the pricing strategies, such as pricing objectives,
demand, cost and market competition, in the next phase, an industrial seller designs
appropriate pricing strategies for its products to be marketed.
Fundamentally, the pricing strategies very based on the product nature and the situation in
market. In this, pricing strategies for following situations are expected to consider.
Competitive bidding in competitive markets.
Pricing new products.
Pricing throughout the product life cycle.
Now, above three situations are discussed in detail.
1. Competitive Bidding
Many industrial sellers do their business through competitive bidding. As examples,
government undertakings, such as Sri Lanka Transportation Board, Ceylon Electricity
Board and Railways Department buy heavy equipment, machineries through
competitive bidding as well as sell used ones in the same way. Furthermore, many
private and public companies do their business in the same way as government
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organizations do. Usually, non-standard materials are bought in bidding. In
government organizations, the lowest price is considered as most favorable but the
commercial enterprises decisions in bidding is they finalize decisions based upon
bidders quality, design, delivery and price. There are two types of bidding as
closed/sealed bidding and open. In closed bidding, the potential suppliers are invited
through newspaper tender notice to hand over sealed bids in written. All the bids
should be kept in the tender box by a certain date and time. After, all bids are opened
in the presence of representatives of suppliers who submitted bids. Then, all bidders
commercial terms and prices read out and generally the bidder with the lowest price
will be granted the tender but he should have fulfilled specifications of the product.
Mainly, closed bidding is used by government undertakings.
In open bidding, potential suppliers are asked for submitting bids. After submitting,
the buying organization considers on various offers, negotiates commercial and
technical aspects of products and makes the final decision. This method is normally
utilized by private commercial enterprises. This method consists of bidding and
negotiation.
Strategies for Competitive Bidding
One strategy is probabilistic bidding strategy which has two assumptions; the pricing
objective is profit maximization and the buying organization will put the order on the
lowest price bidder.
There are three variables in this strategy- amount or price of the bid, expectedprofit if
the bid is expected and probability of acceptance of bidprice. Anindustrial marketer
attempts to find out the optimum trade-off between the bid price and the profit as well
as the probability of winning the contract.
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The basic equation is displayed below.
E (A) =P (A)*T (A)
Where,
A =Bid price
E (A) =Expected profit at bid price A.
P (A) =Probability of acceptance of the bid price.
T (A) =Profit if the bid price A is accepted.
Ability to estimate P (A) depends upon the industrial marketers knowledge of
competitors costs, strengths, weakness and mind-set.
2. Pricing New Products
There are two strategies that can be used for new products which are in the
introductory phase of its life cycle.
Skimming strategy
This strategy is utilized for distinctive new products for which customers are not
sensitive to initial high prices. In this, the firm has the capability of recovering its
investment in product development by generating high profits. The disadvantage here
is the highprofits attract competitors into the market. So, this strategy is appropriate
for products that are distinct, technology focused or capital intensive-the factors
creating entry barriers to rivals. As well as, this strategy is useful when the demand
curve is stable over a period of time and the cost of production declines with the
application of experience curve.
Penetration strategy
This strategy is commonly used when price elasticity of demand is high or buyers are
highly price sensitive, strong threats from potential customers and opportunities to
decrease the unit cost of production and distribution with increase in production
volume.
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3. Pricing across Product Life Cycle
The pricing strategies in introduction phase of the PLC were discussed in pricing new
products. Other strategies are expected to be elaborated here.
Growth Stage Pricing Strategy
In growth stage, more new customers enter into the market began buying the firms
products. Here, industrial marketers lower the product price as well as they focus on
product differentiation, product line extension and building new market segments.
Maturity Stage Pricing Strategy
Here, competitors are aggressive in the market. In this, a company has to cut its
competitors market share to increase its sales. The strategy is to lower prices to
match the competitors prices
Decline Stage Pricing Strategies
There are three strategies.
- If the company has a reputation on good product quality or dependable service, do
not cut price but reduce costs to earn some profits.
- Cutting prices to increase sales and using a product to help to sell other product.
- Selective increases in prices in markets that are not price sensitive.
3. Industrial Pricing Policies
Mainly, industrial marketers are dealing with different kinds of customers, such as users,
Original Equipment Manufacturers (Caterpillar and Toyota) and dealers. These pricing
policies are to adjust the base (or list price) of a product. Basically, industrial marketers
set a price structure that covers different product items with different sizes and product
specifications.
For instance, electric motors are manufactured in different horse power or kilowatt
ratings, different speeds, and distinctive applications. So, the electric motor manufacturer
has to set a base price for the entire range of products.
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Some common industrial pricing policies are discussed below.
1. List Price
This is called as Price List also. It is a base price of a product consisting various sizes
and specifications. This is a published statement of basic prices and given to the
customers. This statement implies the effective date of its applicability and shows the
extra charges for optional product features, such as the excise duty, freight, sales tax,
or transit insurance (if applicable). The net price is calculated based on list price less
discounts (trade, volume and cash discounts). The net price is very important for
buyers since it is the price that should be paid after deducting discounts.
2. Trade Discounts
Trade discounts are offered to marketing intermediaries, such as dealers and
distributors. The amount of trade discount given depends upon the particular industry
norms and the functions performed by those intermediaries. Further these trade
discounts should be uniform to all industrial intermediaries.
3. Quantity Discounts
A quantity or volume discount is given to customers who buy in large quantities as
well as this is a price reduction given by deducting the quantity discount from the list
price of the product. These discounts can be given either on individual orders (non-
cumulative basis) or on a series of orders over a longer period of time, usually one
year (cumulative basis). The purpose of this is to encourage customers to buy in larger
quantities and maintain customer loyalty. The amount of quantity discounts depends
on demand, costs and competition.
4. Cash Discounts
Commonly, cash discounts are given to encourage customers for prompt payments.
This is applicable on gross amount (basic price plus excise duty plus sales tax) of the
bill and this is granted to customers who pay bills within a stated period from the date
of invoice.

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5. Geographical Pricing
Pricing the companys products based upon the different geographical locations of
buyers. Mainly, this happens since the company has to undergo different
transportation costs and transit insurance when delivering products to various
locations. Here, there are two methods in geographical pricing.
- Ex-Factory: here, transportation costs and transit insurance costs should be
incurred by the buyer. ex-factory means the prices prevailing at factory gate.
- FOR Destination or FOB Destination: this means free on road/free on board
destination. In this transportation (freight) costs are absorbed by the seller or
include in the quoted price. Although the small transit insurance costs are
absorbed by the seller, commonly, average transportation costs and transit
insurance costs are included to the basic product price. In this method, all
customers get the product at the same price irrespective of their location from the
sellers factory premises. However, in the intense competition sellers can the
whole transportation and transit insurance costs.
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References
Hawaldar, K. Krishna. (2002). Industrial Marketing (1
st
ed.). TATA McGraw-Hill Publishing
Company Limited, New Delhi.
Laric, M. V. (1980). Pricing strategies in industrial markets, European Journal of
Marketing, 14(5/6), 303-321.
Robert, R.Reeder., Edward, G.Betty & Betty,H.Reeder. (2001). Industrial marketing (2
nd
ed.).
prentice-Hall of India Private Limited, New Delhi.
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