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Instructor’s Manual
Chapter 8
Business Marketing Management
CHAPTER
8
BUSINESS PRICE PLANNING AND STRATEGY
LEARNING OBJECTIVES
After reading this chapter, the student should be able to:
 Comprehend the importance of setting price in the business-to-business sector.
 Understand the major factors that influence pricing strategy.
 Distinguish between marginal pricing strategy, the economic value to the customer concept, target
return-on-investment pricing, target costing, and zero based pricing.
 Discuss the concept of price elasticity and demand strategy.
 Relate the changes that occur in the pricing element of the marketing mix throughout the various
phases of the product life cycle.
 Distinguish between a market skimming and market penetration strategy.
 Describe conditions under which a price leadership strategy would be used.
 Comprehend the importance and operation of competitive bidding in setting business prices in
appropriate markets.
 Describe how it feels to make actual price decisions.
 Communicate the value of leasing as an alternative to purchasing in a business market.
 Distinguish among the various types of price adjustments commonly given in business purchasing
transactions.
CHAPTER OVERVIEW
Because there are so many variables to consider whose precise influence cannot be anticipated,
pricing decisions are often made by guesswork, intuition, or reliance on such methods as traditional
markup percentages. The major factors upon which the success of pricing strategy is based include
competition, cost, demand, pricing objectives, impact on other products, and legal considerations. An
important step in pricing strategy is to determine goals and objectives prior to setting price points or
levels. The principal pricing objectives of most business-to-business firms include profit generation, a
satisfactory return on investment, and the maintenance or increase of market share. Often the purchase of
one product increases the likelihood of the purchase of another product or product line by the same
customer.
Among the pricing methods and strategies commonly used by business price setters are marginal
pricing, break-even analysis, and target return-on-investment pricing. Marginal pricing is often used by
contract bidders to gain unplanned business or to utilize idle capacity. A value-based strategy, such as the
relatively new method of analyzing a product’s economic value to a customer, can be a uniquely effective
way to gain a commanding lead over the competition. Break-even analysis is undertaken to determine the
point at which a firm’s revenue will equal its total fixed and variable costs at a given price. Target return-
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on-investment pricing is a method of setting prices to achieve a particular percentage return on capital
invested in the product in question.
Demand refers to the amount of a good or service that a buyer is willing and able to purchase at a
given moment at each possible price. Demand is elastic if quantity is highly responsive to price and
inelastic if it is not. Unitary demand elasticity exists when the percentage change in price is identical to
the percentage change in quantity demanded. When attempting to determine demand, cost-benefit
analysis is an analysis of benefits received and costs incurred by the customer in buying and using the
business product or service.
A new product generally enjoys its greatest degree of differentiation during the introductory stage of
the product life cycle. Pricing decisions at this stage of the product’s life center either on price skimming
or market-penetration pricing, depending on the nature of the market and the type of customer involved.
There are specific price considerations that the business marketer must consider during each phase of the
product’s life cycle with respect to profit, demand, and marketing strategy.
The price-leadership strategy prevails in oligopolistic situations and is the practice by which one or a
very few firms initiate price changes, with one or more of the other firms in the industry following suit.
Price leadership is found most often in industries where products are similar; therefore, they are usually
considered by customers to be good substitutes for each other.
Competitive bidding is a process whereby a business buyer will request price bids from interested
suppliers on a proposed purchase or contract. Government agencies and most public institutions are
required to use the competitive bidding system in buying products and services. Competitive bidding can
take the form of either closed or open bidding. A probabilistic bidding model is a mathematical technique
used to determine prices in a bidding structure and assumes that competitors will behave in the future as
they have in the past.
Many business customers choose to lease an asset rather than to purchase it; and for the business
marketer, leasing can provide a very viable alternative to selling capital equipment. In the business
market, most capital goods and equipment manufacturers employ leasing. There are several advantages
of leasing over purchasing from both the buyer’s and the seller’s points of view. Two primary forms of
business leases are the operating lease and the direct financing lease.
The business marketer must be concerned with net price, which is the list price minus allowances for
trade-ins and other cost-significant concessions offered by the seller. The establishment of a list price
provides the base from which discounts can be subtracted. Discounts come in many forms, with trade,
quantity, and cash discounts being the most prevalent. Geographic price adjustments are also frequently
made to the list price. Business marketers should be prepared to justify price levels, along with quantity
and trade discounts.
LECTURE OUTLINE
BUSINESS PRICING: AN OVERVIEW
MAJOR FACTORS INFLUENCING PRICE STRATEGY
Customer Value
Competition
Cost
Demand
Pricing Objectives
Maximizing General Profit
Achieve Return on Investment
Maintain or Increase Market Share
Impact of Price on Other Products
Legal Considerations
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Price Fixing
Exchanging Price Information
Predatory Pricing
PRICING METHODS
Marginal Pricing
Economic Value to the Customer
Break-Even Analysis
Target Return-on-Investment Pricing
Target Costing
Zero-Based Pricing
DEMAND ASSESSMENT AND STRATEGY
Price Elasticity of Demand
Cost-Benefit Analysis
LIFE-CYCLE COSTING
Introduction Phase: New-Product Pricing Strategies
Price Skimming
Market-Penetration Pricing
Growth Phase
Maturity Phase
Decline Phase
PRICE-LEADERSHIP STRATEGY
COMPETITIVE BIDDING
The Bidding Process
Closed versus Open Bidding
Price Changes
LEASING IN THE BUSINESS MARKET
Advantages of Leasing for the Buyer
No Down Payment
No Risks of Ownership
Advantages of Leasing for the Seller
Increased Sales
Ongoing Business Relationship with the Lessee
Residual Value Retained
Types of Lease Arrangements
Types of Business Leases
Operating Lease
Direct-Financing Lease
PRICING DISCOUNT STRATEGIES IN BUSINESS MARKETING
Trade Discounts
Quantity Discounts
Cash Discounts
Geographical Price Adjustments
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Instructor’s Manual
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Business Marketing Management
TEACHING SUGGESTIONS
Most students will likely perceive this chapter as difficult. Therefore, the instructor should plan to
spend more time with this material and follow the text somewhat closely for instructional purposes. The
use of graphs and charts in the chapter should be very helpful. The “Strategy at Work – Conner
Technology to Produce Lowest Cost Disk Drives” box can be used to introduce students to how a firm
may actually go about a pricing decision. The “Business Marketing in Action – Buyer Price
Sensitivity” assignment is intended to get the students thinking about customer price-sensitivity while
developing a plan to estimate price points. The “Business Marketing in Action – Selling Orientation
and Under Pricing Leads to Chapter 11 Bankruptcy” assignment requires students to hear first hand
what buyers think about suppliers who try to “buy” the business. The “Business Marketing in Action –
Learning How It Feels To Make Actual Price Decisions” assignment features a series of marketing
manager “in-box” communications that require the students to make strategy and pricing decisions. The
ethical situation presented in “What Would You Do? – Precision Color Fibers at EFFI” can be used to
stimulate discussion about ethical dilemmas. In Case 8-1 Seneca Plastics Inc., the objective is to have
the students feel what it is like to have to make an important pricing decision. Finally, in Case 8-2 MetaTronics Ltd. (An Internet Application Case), students can learn a few new things about countertrade and
become able to recommend marketing to countries they would previously not have considered.
ANSWERS TO REVIEW QUESTIONS
1. Why is price planning not a precise science? Identify and describe the six major factors influencing
pricing strategy. Discuss three common pricing objectives. What is meant by a complementary
relationship?
Because there are so many variables to consider whose precise influence cannot be
anticipated, pricing decisions are often made by intuition, guesswork, or reliance on such
methods as traditional markup percentages. Six major factors affecting pricing strategy
are competition, cost, demand, pricing objectives, impact on other products, and legal
considerations. There are two kinds of competitive factors that influence price. One is
the competitive effect on demand for the marketer’s product, and the other is the reaction
of competitors to any price move the marketer might make. Fixed and variable costs are
of major concern to the business marketer charged with establishing price levels.
Various elements of cost must be differently related in setting prices, with the analysis
demonstrating how computations of full cost, incremental cost, and conversion can vary;
and how these costs affect product-line pricing. Demand is based on a variety of
considerations, of which price is just one. Others include ability of customers to buy,
willingness of customers to buy, benefits that the product provides to customers, prices of
substitute products, potential market for the product, nature of nonprice competition,
segments in the market, and customer behavior in general. An important step in pricing
strategy is to determine goals and objectives prior to setting price points or levels.
Business marketers should be aware of the possible legal problems that can arise in
using certain types of discounts and allowances. Care is needed to avoid engaging in
illegal price discrimination, along with such practices as price fixing, the exchange of
price information among competitors, and predatory pricing. Three common pricing
objectives are general profit, achieving return on investment, and maintaining or
increasing market share. Profit is probably the most often stated company objective. A
profit-maximization goal is likely to be far more beneficial to the firm if practiced over
the long run. Products may be priced to achieve a certain return on investment. This
criterion is typically selected as a goal by firms that are leaders in their industry, such as
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General Motors and Alcoa. This objective makes it simpler to measure and control the
performance of separate divisions, departments, and products. Maintenance of, or
changes in, market share is a popular type of objective because market share is
measurable and may be a better indicator of general financial corporate health than
return on investment, particularly when the market is growing. Gaining marketing share
because of a good reputation for quality and market service will generally affect long-run
profits favorably. Often the purchase of one product increases the likelihood of purchase
by the same customer of another product or product line. This is what is meant by a
complementary relationship.
2. Explain the pricing methods of: 1) marginal pricing, 2) EVC, 3) break-even analysis, and 4) target
return-on-investment pricing. What is the fundamental reason for using each of these methods?
Marginal pricing is a basic conceptual approach in setting prices, with the aim being to
maximize profits by producing the number of units at which marginal cost is just less
than or equal to marginal revenue. EVC is the economic value to the customer, which is
a cost comparison between and among products to determine which delivers the best
total value to the customer. Break-even analysis ascertains the point at which a firm’s
revenue will equal its total fixed and variable costs at a given price. Target return-oninvestment pricing is a method of setting prices to achieve an investment goal.
3. What is price elasticity of demand? Distinguish among elastic, inelastic, and unitary demand. How
can cost-benefit analysis be utilized in determining demand for business products?
Price elasticity of demand states that demand is elastic if quantity is highly responsive to
price and inelastic if not. Elastic demand exists when a small percentage decrease in
price produces a larger percentage increase in quantity demanded. Inelastic demand
exists when a small decrease in price produces a smaller percentage increase in quantity
demanded. Unitary price elasticity exists when the percentage change in price is
identical to the percentage change in quantity demanded. When used in determining
demand, cost-benefit analysis is an analysis of benefits received and costs incurred by the
customer in buying and using a business product or service.
4. Differentiate between price skimming and market-penetration pricing. Under what circumstances
would you use each? What are the primary price considerations in each phase of the product life
cycle?
Price skimming is setting a relatively high price that will encourage competitive entry,
and market penetration is setting a price at or near the point it will eventually reach after
competition develops. With market penetration, the firm attempts to gain a large volume
of initial sales even though profit per unit may be low. In the introduction stage of the
product life cycle, the marketer must decide whether to use a skimming or a penetration
price. In the growth stage, the firm can lower the price due to acquiring economies of
scale and the benefits of the experience curve. In the maturity stage, the marketer will
generally find it advisable to reduce prices as soon as the symptoms of deterioration
appear. In the decline stage, a number of options are possible. Price may be left alone if
cost control is utilized. The price may be raised to take advantage of market segments
with inelastic demand. Finally, the product may be used as a loss leader.
5. What is price-leadership strategy? In what kinds of industries is such a pricing strategy commonly
found? How does a business-to-business company maintain its price-leadership position?
Price-leadership strategy prevails in oligopolistic situations and is the practice by which
one or a very few firms initiate price changes, with most or all of the other firms in the
industry following suit. Price leadership is found most often in industries whose products
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are similar, even standardized, and, therefore, considered by customers to be good
substitutes for each other. The presence of a specific and consistent pricing strategy, the
use of controlled power, and the recognition of the rights of followers to their respective
market positions will sustain a leadership position.
6. What is the competitive bidding process and what types of organizations typically use such a
process? Identify five criteria that should be used by a firm considering whether to bid on a particular
piece of business. What is the fundamental difference between an open bid and a closed bid?
Competitive bidding is a process whereby a business buyer will request price bids from
interested suppliers on a proposed purchase or contract. Governmental units and most
public institutions are required to buy products and services on the competitive bidding
system. Five criteria include the following: 1) Is the dollar value of the job large enough
to warrant the expense involved in making the bid? 2) Are the product or service
specifications precise enough so that the cost of production can be accurately estimated?
3) Will the acceptance of the bid adversely affect production and the ability to serve other
customers? 4) How much time is available to prepare a bid? 5) What is the likelihood of
winning the bid considering the presence and strength of other bidders? Closed bidding
involves sealed bids that are opened, reviewed, and evaluated at the same time. Open
bidding is more informal and allows for negotiation.
7. What is involved in a leasing agreement? What type of organization uses leasing transactions most
frequently? Identify three advantages of leasing from a buyer’s perspective and three from a seller’s
perspective. Distinguish between an operating lease and a direct-financing lease.
A leasing agreement conveys the right to use property, plant, or equipment usually for a
stated period of time. In the business market, leasing strategy is employed by most
capital goods and equipment manufacturers, including those that market production
machinery, postage meters, packaging equipment, textile equipment, and copiers. Three
advantages for the buyer are no down payment, no risk of ownership, and tax benefits.
Advantages for the seller are increased sales, an ongoing relationship with the lessee,
and the retention of residual value. An operating lease is usually short-term and
cancelable. The lessor gives up the physical possession of the asset, but the transfer is
considered temporary in nature. A direct-financing lease is noncancellable, usually
long-term, and fully amortized over the period of the contract. The sum of the lease
payments exceeds the price paid for the asset of the lessor.
8. How is net price determined? Identify and discuss the three most prevalent types of price discounts.
When are transportation fees an important pricing consideration?
The net price is the list price minus allowances for trade-ins and other cost-significant
concessions made by the buyer. A trade discount is a deduction from the list price
offered to an intermediary for services performed. A quantity discount is a deduction
from the list price that a manufacturer gives either to channel intermediaries or to OEM
users for buying in large amounts. A cash discount is a price-reduction strategy to
encourage business buyers to pay their bills promptly. Transportation fees are an
especially important factor when pricing large bulky products, such as industrial
machinery and equipment that must travel a long distance.
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