Description
It explains the factors influencing pricing decision. Different pricing strategies: Skimming strategy, Penetration strategy. Key terms associated with pricing. Terms of payments like direct payment, letter of credit, bank guarantees, price basis, leasing, types of lease.
Pricing Strategies and Commercial Terms in Industrial Markets
Factors Influencing Pricing Decision
• Pricing objectives
– – – – – – – Survival Maximum Short Term Sales Maximum Short-term profits Market Penetration Maximum Market Skimming Product-Quality Leadership Other Pricing Objectives
Factors Influencing Pricing Decision
• Demand Analysis
– Determines the change in demand for a product with change in prices – Demand curve indicates degree of price sensitivity – Formula for Price Elasticity of Demand
– Demand is inelastic when
• Few Competitors • Non availability of substitutes • Buyers think higher prices are justified by Inflation
– Industrial markets are technically sophisticated, hence relatively inelastic
Factors Influencing Pricing Decision
• Cost-benefit Analysis
– Benefits are grouped as:
• Soft Benefits: Customer Training, Warranty, Customer service, Company Reputation, etc
• Hard Benefits: Physical attributes like production rate of machine, rejection rate of component, price/performance Ratio, etc
Factors Influencing Pricing Decision
• Cost-benefit Analysis (Cont’d)
• Costs are classified as:
– – – – – – – Fixed Cost Variable Cost Total Cost Semi Variable Cost Direct Cost Indirect Cost Allocated Cost
• Cost Behaviour is different at different levels of output
Factors Influencing Pricing Decision
• Competitive Analysis
– Information on product quality, technical expertise, and delivery performance of the competitor – Use a market research firm
– Use price as a mechanism to position the product
– Study and anticipate reactions of competitors to our pricing changes
Factors Influencing Pricing Decision
• Government Regulations
– Price discrimination by offering cash, volume or trade discount to distributors or dealers is prohibited – Predatory pricing (firm with dominant position reducing its pricing structure) is not permitted
Pricing Strategies
Introductory Stage Pricing Strategies
• Skimming Strategy
• High Initial Price
• Recovers investment faster
• Attracts competition due to high profits
• To be used when demand curve is stable over time • Use when product is distinctive with sophisticated technology
Introductory Stage Pricing Strategies
• Penetration Strategy
• Used when Price elasticity of demand is very high • Used if there is strong threat from potential competitors • Opportunity exists to reduce unit cost of production & distribution • Use Economies of Scale • Thus long-term profit is through large market share rather than short-term profit objectives
Growth Stage Pricing Strategy
• Pressure to reduce prices, due to competition • Focus attention on product differentiation, product line extension and building new market segments
• Buy from more than one supplier
Maturity Stage Pricing Strategy
• Competitors become aggressive • Need to cut into competitors’ market share to increase sales volume.
• Adopting the low price strategy to match the competitor’s prices
Decline Stage Pricing Strategy
• Wide choice of pricing strategies • Need not cut the price but reduce the cost to earn profits if it has built a reputation of high product quality and dependable services • Reduce the prices to increases sales volume above breakeven volume of sales • Use the product to help sell other products in the product mix.
Commercial Terms and Conditions
Key Terms associated with Pricing
• List Price
– base price or the basic price of a product consisting of various sizes or specifications – indicates the effective date of its applicability and mentions the extra charges for optional product features, the excise duty, freight, sales tax, octroi, and transit insurance
• Trade Discounts
– offered to the intermediaries such as dealers and distributors – depends on the particular industry norms or the functions performed by the intermediaries
Key Terms associated with Pricing
• Quantity Discounts
– Granted to industrial customers who buy large volumes – to encourage customers to buy larger quantities and to maintain their loyalty
• Cash Discount
– To ensure prompt payments – discount applicable on the gross amount of the bill, provided customer pays the bill within the stipulated period from the date of invoice
Key Terms associated with Pricing
• Geographical Pricing
– Refers to the location at which the price is applicable – Ex-Factory
• prices prevailing at the factory gate • Seller charges the costs of freight and insurance to the buyer
– FOR destination or FOB destination
• Freight costs are absorbed by the seller or included in the quoted prices • All the customers get the product at the same price irrespective of their locations from the seller’s factory premise
Terms of Payment
• Direct Payment
– Credit normally offered to a customer who is a good paymaster or creditworthy – Goods despatched directly to customer and invoice or bill is sent along with other documents – Upto 90 days credit may be available
Terms of Payment
• Payments through Bank
• Letter of Credit
• Safest, as payments are assured • Check correctness of LC before despatch of goods
• Documents on acceptance
• Documents sent to customer’s bank without any credit
• Documents against payment
• Documents handed over to buyer with an acceptance signature that the payment will be made on due dates • Less safe
Terms of Payment
• 95/5 or 98/2 Payment Terms
• Used by government orgs like Indian Railways, Department of Telecommunication etc. • 95/98 percent payment done after supplier sends the bill, along with proof of despatch
• Remaining 5/2 percent given to supplier after getting certified copy of Bill Copy Payable Challan certified and acknowledge by consignee
Terms of Payment
• Bank Guarantees
• Preferred in some cases
• Value of BG may be up to 5 percent of ordered value (max 1L)
• In case the supplier does not fulfil the contract, the buyer can invoke the BG and collect its value • In some cases BG may be extended at the request of supplier for which commission may be charged
Terms of Payment
• Price Basis
• Prices are generally quoted excluding excise duty, sales tax and other government levies and duties. • They are quoted on basis of ex-works or FOR destination • In such cases, price includes packing, forwarding, transit insurance, etc.
• Price may be firm (no changes) or with price variation clause (PVC) or price ruling at time of delivery (PRD)
• PVC formula is finalized by industry association in consultation with representatives of suppliers and buyers
Leasing
• An alternative to selling capital goods • An arrangement between the leasing firm or the lessor and the user or the lessee, the former arranging to purchase the capital equipment for the use of the latter • Lessee has to pay the lessor in the form of rentals and the lessor remains owner of the equipment during the specified period.
Types of Lease
• Operating Lease • Financial Lease • Sale and Lease back transaction • Leveraged Lease
Thank You
doc_380947299.pptx
It explains the factors influencing pricing decision. Different pricing strategies: Skimming strategy, Penetration strategy. Key terms associated with pricing. Terms of payments like direct payment, letter of credit, bank guarantees, price basis, leasing, types of lease.
Pricing Strategies and Commercial Terms in Industrial Markets
Factors Influencing Pricing Decision
• Pricing objectives
– – – – – – – Survival Maximum Short Term Sales Maximum Short-term profits Market Penetration Maximum Market Skimming Product-Quality Leadership Other Pricing Objectives
Factors Influencing Pricing Decision
• Demand Analysis
– Determines the change in demand for a product with change in prices – Demand curve indicates degree of price sensitivity – Formula for Price Elasticity of Demand
– Demand is inelastic when
• Few Competitors • Non availability of substitutes • Buyers think higher prices are justified by Inflation
– Industrial markets are technically sophisticated, hence relatively inelastic
Factors Influencing Pricing Decision
• Cost-benefit Analysis
– Benefits are grouped as:
• Soft Benefits: Customer Training, Warranty, Customer service, Company Reputation, etc
• Hard Benefits: Physical attributes like production rate of machine, rejection rate of component, price/performance Ratio, etc
Factors Influencing Pricing Decision
• Cost-benefit Analysis (Cont’d)
• Costs are classified as:
– – – – – – – Fixed Cost Variable Cost Total Cost Semi Variable Cost Direct Cost Indirect Cost Allocated Cost
• Cost Behaviour is different at different levels of output
Factors Influencing Pricing Decision
• Competitive Analysis
– Information on product quality, technical expertise, and delivery performance of the competitor – Use a market research firm
– Use price as a mechanism to position the product
– Study and anticipate reactions of competitors to our pricing changes
Factors Influencing Pricing Decision
• Government Regulations
– Price discrimination by offering cash, volume or trade discount to distributors or dealers is prohibited – Predatory pricing (firm with dominant position reducing its pricing structure) is not permitted
Pricing Strategies
Introductory Stage Pricing Strategies
• Skimming Strategy
• High Initial Price
• Recovers investment faster
• Attracts competition due to high profits
• To be used when demand curve is stable over time • Use when product is distinctive with sophisticated technology
Introductory Stage Pricing Strategies
• Penetration Strategy
• Used when Price elasticity of demand is very high • Used if there is strong threat from potential competitors • Opportunity exists to reduce unit cost of production & distribution • Use Economies of Scale • Thus long-term profit is through large market share rather than short-term profit objectives
Growth Stage Pricing Strategy
• Pressure to reduce prices, due to competition • Focus attention on product differentiation, product line extension and building new market segments
• Buy from more than one supplier
Maturity Stage Pricing Strategy
• Competitors become aggressive • Need to cut into competitors’ market share to increase sales volume.
• Adopting the low price strategy to match the competitor’s prices
Decline Stage Pricing Strategy
• Wide choice of pricing strategies • Need not cut the price but reduce the cost to earn profits if it has built a reputation of high product quality and dependable services • Reduce the prices to increases sales volume above breakeven volume of sales • Use the product to help sell other products in the product mix.
Commercial Terms and Conditions
Key Terms associated with Pricing
• List Price
– base price or the basic price of a product consisting of various sizes or specifications – indicates the effective date of its applicability and mentions the extra charges for optional product features, the excise duty, freight, sales tax, octroi, and transit insurance
• Trade Discounts
– offered to the intermediaries such as dealers and distributors – depends on the particular industry norms or the functions performed by the intermediaries
Key Terms associated with Pricing
• Quantity Discounts
– Granted to industrial customers who buy large volumes – to encourage customers to buy larger quantities and to maintain their loyalty
• Cash Discount
– To ensure prompt payments – discount applicable on the gross amount of the bill, provided customer pays the bill within the stipulated period from the date of invoice
Key Terms associated with Pricing
• Geographical Pricing
– Refers to the location at which the price is applicable – Ex-Factory
• prices prevailing at the factory gate • Seller charges the costs of freight and insurance to the buyer
– FOR destination or FOB destination
• Freight costs are absorbed by the seller or included in the quoted prices • All the customers get the product at the same price irrespective of their locations from the seller’s factory premise
Terms of Payment
• Direct Payment
– Credit normally offered to a customer who is a good paymaster or creditworthy – Goods despatched directly to customer and invoice or bill is sent along with other documents – Upto 90 days credit may be available
Terms of Payment
• Payments through Bank
• Letter of Credit
• Safest, as payments are assured • Check correctness of LC before despatch of goods
• Documents on acceptance
• Documents sent to customer’s bank without any credit
• Documents against payment
• Documents handed over to buyer with an acceptance signature that the payment will be made on due dates • Less safe
Terms of Payment
• 95/5 or 98/2 Payment Terms
• Used by government orgs like Indian Railways, Department of Telecommunication etc. • 95/98 percent payment done after supplier sends the bill, along with proof of despatch
• Remaining 5/2 percent given to supplier after getting certified copy of Bill Copy Payable Challan certified and acknowledge by consignee
Terms of Payment
• Bank Guarantees
• Preferred in some cases
• Value of BG may be up to 5 percent of ordered value (max 1L)
• In case the supplier does not fulfil the contract, the buyer can invoke the BG and collect its value • In some cases BG may be extended at the request of supplier for which commission may be charged
Terms of Payment
• Price Basis
• Prices are generally quoted excluding excise duty, sales tax and other government levies and duties. • They are quoted on basis of ex-works or FOR destination • In such cases, price includes packing, forwarding, transit insurance, etc.
• Price may be firm (no changes) or with price variation clause (PVC) or price ruling at time of delivery (PRD)
• PVC formula is finalized by industry association in consultation with representatives of suppliers and buyers
Leasing
• An alternative to selling capital goods • An arrangement between the leasing firm or the lessor and the user or the lessee, the former arranging to purchase the capital equipment for the use of the latter • Lessee has to pay the lessor in the form of rentals and the lessor remains owner of the equipment during the specified period.
Types of Lease
• Operating Lease • Financial Lease • Sale and Lease back transaction • Leveraged Lease
Thank You
doc_380947299.pptx