BUILDING COMPETITIVE

PRICING

PRICE-SETTING
IN B2B MARKETS

BUSINESS-TO-BUSINESS MARKETING
Senior Assist. Prof. Vanya Kraleva
Learning Outcomes
 Understand how cost analysis, competitor analysis, and
customer analysis, are essential elements of well-
informed price decisions in business markets.
 Be able to apply sales breakeven analysis (cost-
volume-profit analysis) to business pricing decisions.
 Understand the different price positioning strategies
that can be used in business to business markets.
 Know what types of inter-departmental conflict can
arise in pricing decisions.
 Understand how long-term buyer-supplier relationships
affect pricing in business markets.
 Take into account ethical issues in pricing.
The Importance of Pricing Strategy
 Price has a direct and substantial effect on profitability
 5% increase in price increases earnings before interest and
taxes (EBIT) by 22%,
 5% increase in sales turnover increases EBIT by 12%
 5% reduction in cost of good sold increases EBIT by 10%

 Deflationary pressures in world markets

 Cost-reduction processes due to the experience effect
 Low-cost manufacturing capacity in emerging economies
 Reductions in international trade barriers
 Deregulation of markets
 Internet price comparison
The Three C’s of Pricing

Costs Customers Competitors

• Price floor • Price ceiling • Feasible
pricing region
Cost-Plus Pricing
To calculate the price of a manufactured component
£
Variable costs of production (e.g. materials, direct labour) 5.75
Allocated overhead costs (see below) 3.49
Full cost of production 9.24
Desired profit margin (20%) 1.85
Final selling price 11.09

Calculation of allocated overhead

Total overhead cost for factory £150,000.00

Expected sales volume 43,000 units

Overhead cost per unit £3.49

Complicating factors
How to allocate overhead between multiple products manufactured using the same
facilities?
What happens if sales volume is higher or lower than target?
The Logic of Cost-Plus Pricing
 Cost-plus pricing contains a fundamental logical
flaw at its very heart:
 Inorder to set price one must know average costs of
production
 One cannot know the average cost of production
without knowing production and sales volume
 Sales volume is expected to vary with price

 Therefore, in order to set price one must first know …

price!
Task 1
 ABC Ltd. is setting the price for a new product, using
cost-plus pricing. Variable costs of production for
this product are estimated to be £1,000 per unit,
and overheads of £200 per unit will be allocated
to the product. The company wants to achieve a
50% profit margin on costs (50% markup). What
selling price should ABC set?
Task 1

 Answer: £1,000+£200+£600 = £1,800 price.

Task 2
 In question 1, ABC Ltd. assumed that sales volume
for the new product would be 10,000 units in the
first year. In fact, ABC manages to achieve sales
volume of 15,000 units on the product. As a result,
does it achieve a higher or a lower profit margin
than expected on this product?
Task 2
 Answer: Since overhead costs are distributed among
higher than expected sales, £200 turns out to be
higher than the actual overhead per unit. Therefore,
the profit margin is higher than expected. (Total
overheads are 10,000x£200 = £2,000,000; the
actual unit overhead is therefore £133.33 at sales
of 15,000.)
Break-Even Sales Analysis

 If we cut price, then by how much must sales volume

increase so that we increase our profit?

 If we raise price, then by how much can sales

decline before we incur a loss?
Break-Even Sales Analysis

Fixed costs – £ 7500 Price 1 – £ 10

Variable costs - £ 2,50 Price 2 – £ 12
Break-Even Sales Analysis

𝐹𝐶
𝐵𝐸𝑉 =
(𝑃 − 𝑉𝐶)

− 𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
% 𝐵𝑟𝑒𝑎𝑘 ̵𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠 𝑐ℎ𝑎𝑛𝑔𝑒 =
𝐶𝑀+𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
x 100

BEV: Breakeven sales volume

FC: Fixed costs
P: Price
VC: Variable costs
CM: Contribution margin (P-VC)
Task 3
 Assuming that the fixed costs of producing the new
product are £1,000,000, and the variable costs are
£1,000 per unit, how many units does ABC Ltd.
have to sell to break even at a price of £2,000?
Task 3

 Answer: Contribution margin per unit is £1,000, so

breakeven sales volume is 1,000 units.

 CM = P – VC = £ 2000 – £1000 = £ 1000

 BEV = FC/CM = £1000000/ £1000 = 1000 units

Task 4
 Assuming that fixed costs are £1,000,000 and
variable costs are £1,000, how many units does
ABC Ltd. have to sell to break even at a price of
£3,000?
Task 4

 Answer: Contribution margin is £2,000, so

breakeven sales volume is 500 units.

 CM = P – VC = £3000 - £1000 = £2000

 BEV = FC/CM = £1000000/ £2000 = 500 units

Task 5
 Currently ABC Ltd. is selling 1500 units at the price
of £2,000. The variable costs are £1,000 per unit.
If they change the price to £2,200 by how much
could volume decline before profits were reduced?
Task 5
 Answer: ABC Ltd. should consider increasing the
price from £2,000 to £2,200 only if research tells
that its sales volume will fall by less than 16,6%
(which means that they should be able to sell at
least 1251 units)

− 𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
 % 𝐵𝑟𝑒𝑎𝑘 ̵𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝑥 100
𝐶𝑀+𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒

−200 −200
= 𝑥 100 = 𝑥 100 = −16,6 %
(2000 −1000 +200) 1200
The Demand Curve and Price Elasticity

Elastic demand

Inelastic demand

Perverse demand
Demand Elasticity
 Demand elasticity:
 Elastic demand – 1% change in price causes demand
change of more than 1%
 Inelastic demand – 1% change in price causes demand
change of less than 1%
 Thus:
 Where demand is elastic, a price increase will reduce
revenue and price cut will increase revenue
 Where demand is inelastic, a price increase will
increase revenue and a price cut will decrease revenue
Signs of Inelastic Demand
 Demand will tend to be inelastic for industrial brands that:
 Customers need urgently
 Are strongly differentiated
 Compete against few alternative customer solutions
 Are complex and difficult to compare
 Are complementary to other highly priced products
 Involve high switching costs
 Customers see the price as a quality indicator
 Customers buy for flamboyant motives
 Account for a small proportion of the buyer’s total expenditure
 Where the price can be shared by multiple buyers
Competitive Analysis
 Most markets are dominated by a few substantial
competitors
 Under oligopoly pricing is generally a zero-sum game
because the gains of one player are the losses of
another
 There is a risk of price war which will lower the price
for the whole industry
 Legal price behaviour to avoid the risk of price war:
 Price leadership
 Price stability
The Pricing Wheel
Pricing Objectives
 What might be the objectives of pricing strategies?
 Profits
 Survival
 Sales volume
 Sales revenue
 Market share
 Image creation
 Competitive parity or advantage
 Barriers to entry
 Perceived fairness
Price Positioning
Perceived benefits of competing suppliers’ offerings

Low Med High

Low Chancer Thriver Market

P Ruler
R
I
C Bungler Also-Ran Thriver
E Med

No-Hoper Bungler Chancer

High
The Pricing Plan
 Overall summary
 Overview of the current marketing situation
 Pricing SWOT analysis
 Pricing strategy
 Pricing objectives
 Pricing programs
 Pricing control and review
The Pricing Committee
 The Pricing Committee might include:
 Finance

 Accounting

 Marketing

 Sales

 Operations

 Senior management
 How much price authority
should be given to sales people?
Pricing Authority of Sales People
 Sales people tend to give discount to save time and effort involved in
creative selling
 Sales people may overestimate customer price sensitivity because of their
high motivation to sell
 When sales people are given more price discretion this may alter
corresponding competitive behaviour in the market
 When customers know that sales people have price discretion, they may
adopt more aggressive price negotiation tactics
 Using a sales incentive scheme based on gross profit margin may not be
sufficient to ensure that salespeople make optimal pricing decisions
 First, sales people may not understand the implications of such an incentive
scheme
 Second, on any one deal the loss of commission resulting from giving the
customer an extra discount may appear insignificant, compared to the sense of
satisfaction arising out of making the sale
Long-Term Relationships
Costs
• Demanding customers
difficult to serve
• Short-term price
concessions demand
• Less gross profit margin

Benefits
• Increased sales
• Greater sales stability
• High switching costs for
the customer
• Better return on investment
Supply Chain Pricing

In supply chain pricing the participants in the supply

chain should collaborate to ensure that the realized
value from the sale of the end product is optimized, and
then how that value is distributed between members of
the supply chain. A more collaborative approach to
pricing will increase overall profitability.
Illegal Pricing Tactics
 Anticompetitive pricing (Price-fixing)
 occurs where a group of producers collude to raise prices above
the level that would apply in a freely operating market
 used to reduce risks of price wars
 Collusive tendering
 occurs where there is an exclusive agreement between
competitors, either to tender or to tender in such a manner as not
to be competitive with one of the other tenderers
 Dumping
 selling of exported goods in a foreign market below the price of
the same goods in the home market
 selling goods on prices bellow the price floor
Five Ethical Levels
 Pricing is ethical where the buyer voluntarily pays
the agreed price.
 Pricing is ethical where both parties have equal
information.
 Pricing is ethical where there is no exploitation of a
buyer’s ‘essential needs’.
 Pricing is ethical where it is justified by costs.
 Pricing is ethical where everyone has equal access
to goods and services regardless of ability to pay.
Source: Nagle & Holden 2002
Questions for discussion
 What are the characteristics that differentiate an oligopoly from a
perfectly competitive market and from a monopoly? What difference
does this make to pricing strategy?
 Explain why, in an oligopolistic industry that faces inelastic demand and
in which there is no acknowledged price leader, it is inadvisable for a
firm to pursue a price-cutting strategy aimed at increasing market share.
 What are the arguments for and against giving sales people a high
level of price discretion during their negotiations with customers?
 From the point of view of costs, prices, revenues, and profitability, what
are the pros and cons of engaging in long-term partnerships with major
customers?
 A business colleague to whom you have shown Nagle and Holden’s
(2002) ‘five ethical levels’ (see the final section of this chapter) simply
cannot understand why any of them is relevant except for the first –
‘pricing is ethical where the buyer voluntarily pays the agreed price’.
What arguments can you provide in favour of going beyond level 1?
What is your own view on the five ethical levels?
Literature Key

• Brennan, R. Canning, L. & McDowell,

Pages
R. Business-to-Business Marketing.
317-345 4th ed. Sage. 2017.