CUSTOMER NEGOTIATION (Chapter 8)

< Increasing trend towards negotiating price

< Capturing value to buyers using a fixed-price (non-negotiable)

policy

< Understanding customers negotiating positions and responding

to them
- price buyers

- loyal buyers

- value buyers

< Motivating your salespeople to sell value

 Exhibit 6.8 Price-Segmentation Model

High

PRICE VALUE
Perceived Pain of Expenditure

SEGMENT SEGMENT

CONVENIENCE LOYAL
SEGMENT SEGMENT

Low

Low High
Perceived Value of Differentiation

Source: Richard Harmer, Boston University

 Pricing with Uncertainty

= Pricing decisions are frequently made with

uncertainty relating to costs, P.S. & competition

= Small amounts of uncertainty can be handled

informally -- large amounts cannot

= When degree of uncertainty (amount) is high and

comes from multiple sources -- formal analysis is
needed

= Quantitative analysis can be used to break

uncertainty (degree & sources) into its constituent
parts -- solving each part separately and reaching an
integrated solution
Illustration of Competitive Bidding Using Expected Values

Exhibit 8.1 Expected value of alternative competitive bids

Amount Profit Probability Expected value

of bid* contribution* of success of bid*
40 12 .24 2.9
39 11 .32 3.5
38 10 .44 4.4
37 9 .47 4.2
* Millions of dollars

Establish trade-off appropriate for companys cost structure

 Competitive Bidding with Quantitative Analysis

< Quantitative analysis is often used to deal with uncertainty

inherent in the competitive bidding process

< Theory of competitive bidding is straightforward, but in

practice there is a need to consider:

i. Capacity available
ii. Trade off between now and later
iii. Past bidding behavior in industry
iv. Knowledge of opponent(s) bidding practices (average
opponent or specific opponent approaches)
v. Estimating probabilities associated with successful
bids
< Illustrations of competitive bidding using quantitative
analysis of historical bid frequencies
Exhibit 8.2 Calculating P WIN Using the Average Opponent Approach

Competitive Bids Probability of Winning Job

Exceeding
Bid Ratio Bid Ratio (%) 2 Opponents 4 Opponents 6 Opponents

0.95 100% 1.000 1.000 1.000

1.00 98 .964 .922 .866
1.05 92 .846 .716 .606
1.10 80 .640 .410 .262
1.15 67 .449 .202 .090
1.20 55 .302 .092 .028
1.25 42 .176 .031 .005
1.30 20 .040 .002 *
1.35 8 .006 * *

* Asterisk denotes a probability of less than .001.

Exhibit 8.3 Analysis of Historical Bid Frequencies: Specific Opponent
Approach
Opponents Competitive Bids Exceeding Bid Ratio (%)

Bid Ratio Opponent A Opponent B Peripheral Opponents

0.95 100% 100% 98%

1.00 98 100 95
1.05 90 95 85
1.10 80 78 70
1.15 70 65 58
1.20 55 60 40
1.25 47 55 33
1.30 30 46 20
1.35 24 33 11
 Using Quantitative /Bayesian Analysis
to Aid Judgment in Pricing Decisions

< Involves no new data, just better organization of it

< Involves making pricing problem tractable (solvable)

in light of high uncertainty

< Informal analysis is always an alternative to formal

analysis -- but presents a greater danger because of
hidden (& extreme) assumptions