B to B marketing

Pricing
SCM
Typical demand curve
B To B Demand curve
Pricing process

Set Pricing
Objective

Develop Pricing
Strategy

Determine
Demand

Estimate
Costs

Review Competitive
Offerings (and costs)

Select Pricing
M e th o d

Establish Pricing
Policies

Determine
Prices
Pricing objectives
• Generally speaking, pricing objectives can be divided into three major types
• profit-oriented- Profit-oriented objectives include pricing to realize a target
return on investment or to maximize profits
• sales-oriented- Sales-oriented objectives aim to increase sales either in
currency or unit terms or to penetrate markets and increase share
• Status quo-oriented... Status quo-oriented pricing includes meeting
competition or choosing to compete on a non-price basis.
• In some cases, a firm does not have the luxury of pricing to maximize its
profits but only to survive in the face of an industry with very strong
competition and overcapacity.
Pricing objectives
• Some firms set an internal rate of return for particular product lines and price
to achieve this.
• Others seek a particular margin on sales.
• The choice depends upon the nature of the industry.
• In a business where few sales are made per year, the target return on
investment is most likely the best approach,
• whereas in a high volume business the margin on sales becomes more
important.
• These accepted versions of pricing strategies do not include the most
favorable approach which is to establish pricing based on the value
customers place on the product.
 General Pricing
Approaches
1. Cost-Based Pricing: a) Cost-Plus Pricing
• Adding a standard markup to cost
• Ignores demand and competition
• Popular pricing technique because:
• It simplifies the pricing process
• Price competition may be minimized
• It is perceived as more fair to both buyers and sellers

Example
Variable costs: Rs. 20 Fixed costs: Rs. 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

Rs. 20 + Rs. 500,000/100,000 = Rs. 25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup Price

 General Pricing Approaches (contd.)
b) Break-Even Analysis & Target Profit Pricing
• Break-even charts show total cost and total revenues at different
levels of unit volume.
• The intersection of the total revenue and total cost curves is the
break-even point.
• Companies wishing to make a profit must exceed the break-even unit
volume.
Revenues
1000 Target profit 200,000
800 Total Costs
Break- even
600 point

400
Fixed Costs
200

0 10 20 30 40 Quantity To Be Sold To
Sales Volume in Thousands of Units Meet Target Profit
 General Pricing Approaches (contd.)
2. Value-Based Pricing
• Uses buyers’ perceptions of
value rather than seller’s costs
to set price.
Business-to-business
• Measuring perceived value
firms seek to retain
can be difficult.
pricing power
• Value-added strategies
can help
• Consumer attitudes toward
price and quality have shifted Value pricing at the retail
during the last decade. level
• Introduction of less expensive • Everyday low pricing
versions of established brands (EDLP) vs. high-low
has become common. pricing
Cost based pricing Vs Value based pricing
Value based pricing - Market
Value based pricing
Economic Value
 General Pricing Approaches (contd.)
3. Competition-Based Pricing
• Also called going-rate pricing
• May price at the same level, above, or below the competition
• Bidding for jobs is another variation of competition-based
pricing
• Sealed bid pricing
Competition based pricing
• Sometimes this simply takes the form of a firm copying their
• competitor's pricing and not conducting their own pricing research.
• Sometimes such pricing can take the form of a firm setting a market share
ob­jective
• and discounting their price relative to their competitor until they attain it.
• Its main advantage is ease of use.
• Extensive marketing research and statistical analysis are not required.
• Instead of setting market share objectives, firms should focus on
• identifying the most profitable segments to serve, and finding ways of
profitably serving them
• while protecting themselves from price wars.
Competition based pricing
• The competitor-based pricing strategy is typically used by fringe firms,
• in an industry with one or two dominant companies.
• In fact, it is sometimes referred to as the "follow the leader strategy. "
• Its main advantage is ease of use.
• Extensive marketing research and statistical analysis are not required.
• The problems with competition-based pricing are that:
• It encourages firms to ignore their unique value proposition.
• It can lead to price wars. For example,
• if a firm sets a market share objective when the market size is fixed or
declining,
• then this immediately signals that this gain in market share will come at the
loss of a competitor.
Competition based pricing
• Focusing on market share does not necessarily lead to maximum profits.
• Competitor-based pricing is purely reactive.
• Price cannot be used as a variable when constructing a marketing mix;
• it becomes a constant over which the firm has no control.
• Instead of setting market share objectives, firms should focus on
• identifying the most profitable segments to serve, and finding ways
• of profitably serving them while protecting themselves from price wars.
 Other Pricing Approaches
• Market-Skimming Pricing
• Setting at high price for a new product to skim maximum revenues
layer by layer from segments willing to pay the high price.

• Market-Penetration Pricing
• Setting at low price for a new product in order to attract a large
number of buyers and a large market share.

• Market Rate Pricing

• Ceding the initiative to the key competitors to set the price.
• Dangerous for leaving the strategic initiative to competitors
• Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in
delivery system capability’.

• Relationship Pricing
• Different price for Different class of customers depending on
relationship and the potentiality of cross-selling or future business.
 Product Mix Pricing
Strategies
• Product Line Pricing
• Setting price steps between Captive-Product Pricing
product line items. o Pricing products that must be
• Line of products rather single used with the main product
one • High margins are often set
• Price points for supplies
• Services: two-part pricing
strategy
• Optional-Product Pricing Fixed fee plus a variable
• Pricing optional or accessory usage rate
products sold with the main
product o Product Bundle Pricing
Pricing bundles of products
sold together
• By-Product Pricing
• Pricing low-value by-products
to get rid of them
 Firm
Customer
– Corporate objectives
– Costs – Value in use
– Marketing program – Perceptions of
– Product assortment p r o d u c t, c o m p a n y
– A b ility to p a y

Environment Pricing Strategy

– Government Competitors
regulations
– Inflation – Offerings
– Currency value and – Pricing
stability – Costs
– Economy
Distribution Channels

– Costs
– Capabilities
– Grey market
possibilities
Customer perception of price
• Customers perceive a total product including core benefits, product attributes, and
support services yielding a package of benefits they need.
• These benefits must be balanced against the costs customers will experience to gain
them.
• The most important cost is the net outlay of funds required from the customer firm to
gain these benefits.
• This outlay is perceived by the customer not simply in terms of the initial price, but in
terms of the value received for the expenditures over the useful life of the product.
• Customer firms are rather sophisticated in their application of discounted cash flow to
pricing offered by vendors and they understand the net difference between one offer
and another.
• Customers may choose to lease rather than own products, thereby increasing the
value of the offering to them.
Customer perceptions of costs and benefits

Benefits Costs
Functional (physical aspects of product, Acquisition (initial price, less discounts, plus
service benefits) freight, installation, taxes)

Operational (reliability/durability) Operational (internal coordination, switching

costs, downtime, training, disposal)
Financial (payback period)
Potential Risks (to operations, personal)
Personal (com m endation for choosing
right product)

Relational (joint working, trust in,

com m itm ent of supplier)
Source: adapted from Menon et al., 2005; Shapiro and Jackson (1978); and Cespedes (1994).
Factors affecting customer price sensitivity
T A B L E 1 0 .3 F a cto rs a ffe ctin g cu sto m e r p ric e s e n sitivity

Economics:
■ percentage of total expense;
■ parts supplier, OEM or end user;
■ importance to operations.
Search and Usage:
■ cost of information search;
■ ease of comparing competitive alternatives;
■ sw itc h in g c o sts.
Competition:
■ differentiation;
■ perception of price.
Source: adapted from Dolan, 1995.
New trends in pricing
• ML pricing (algorithmic or Predictive)
• Transparent Pricing
• Subscription pricing
• Dynamic Pricing
• Personalised Pricing

25
Supply chain management
 What Is the Supply Chain?

• Also referred to as the logistics network

• Suppliers, manufacturers, warehouses,
distribution centers and retail outlets – “facilities”
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

and the

• Raw materials
Transportation

• Work-in-process (WIP) inventory

Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs
Costs

• Finished products

that flow between the facilities

27
 The Supply Chain
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
28
 The Supply Chain – Another View

Plan
Plan Source
Source Make
Make Deliver
Deliver Buy
Buy

Suppliers Manufacturers Warehouses & Customers

Distribution Centers

Transportation Transportation
Material Costs Costs Costs Transportation
Manufacturing Costs Inventory Costs Costs

29
 What Is Supply Chain Management (SCM)?

Plan Source Make Deliver Buy

• A set of approaches used to efficiently integrate

• Suppliers
• Manufacturers
• Warehouses
• Distribution centers
• So that the product is produced and distributed
• In the right quantities
• To the right locations
• And at the right time
• System-wide costs are minimized and
• Service level requirements are satisfied

30
 History of Supply Chain Management

• 1960’s - Inventory Management Focus, Cost

Control
• 1970’s - MRP & BOM - Operations Planning
• 1980’s - MRPII, JIT - Materials Management,
Logistics
• 1990’s - SCM - ERP - “Integrated” Purchasing,
Financials, Manufacturing, Order Entry
• 2000’s - Optimized “Value Network” with Real-
Time Decision Support; Synchronized &
Collaborative Extended Network

31
 Why Is SCM Difficult?

Plan Source Make Deliver Buy

• Uncertainty is inherent to every supply chain

• Travel times
• Breakdowns of machines and vehicles
• Weather, natural catastrophe, war
• Local politics, labor conditions, border issues

• The complexity of the problem to globally optimize a supply

chain is significant
• Minimize internal costs
• Minimize uncertainty
• Deal with remaining uncertainty

32
 The Importance of Supply Chain Management

• Dealing with uncertain environments – matching supply and

demand
• Boeing announced a $2.6 billion write-off in 1997 due to
“raw materials shortages, internal and supplier parts
shortages and productivity inefficiencies”
• U.S Surgical Corporation announced a $22 million loss in
1993 due to “larger than anticipated inventories on the
shelves of hospitals”
• IBM sold out its supply of its new Aptiva PC in 1994 costing
it millions in potential revenue
• Hewlett-Packard and Dell found it difficult to obtain important
components for its PC’s from Taiwanese suppliers in 1999
due to a massive earthquake
• U.S. firms spent $898 billion (10% of GDP) on supply-chain
related activities in 1998

33
 The Importance of Supply Chain Management

• Shorter product life cycles of high-technology products

• Less opportunity to accumulate historical data on customer
demand
• Wide choice of competing products makes it difficult to
predict demand
• The growth of technologies such as the Internet enable
greater collaboration between supply chain trading partners
• If you don’t do it, your competitor will
• Major buyers such as Wal-Mart demand a level of “supply
chain maturity” of its suppliers
• Availability of SCM technologies on the market
• Firms have access to multiple products (e.g., SAP, Baan,
Oracle, JD Edwards) with which to integrate internal
processes

34
 Supply Chain Management and Uncertainty

• Inventory and back-order levels fluctuate considerably

across the supply chain even when customer demand
doesn’t vary
• The variability worsens as we travel “up” the supply chain
• Forecasting doesn’t help!
Multi- Wholesa
Manufact le Retail Consu
tier
Suppli
ers urer Distribu ers mers
tors

Sales

Sales
Sales

Sales
Time Time Time
Time

Bullwhip Effect
35
 What is Supply Chain?

• A supply chain is the system of organizations, people,

activities, information and resources involved in moving
a product or service from supplier to customer.
• An integrated group of processes to “source,” “make,”
and “deliver” products.
• Supply chain activities transform raw materials and
components into a finished product that is delivered to
the end customer.
Supply Chain Flow
 Supply Chain Goals
Efficient supply chain management must result in tangible
business improvements. It is characterized by a sharp focus
on
– Revenue growth
– Better asset utilization
– Cost reduction.
Supply chain management-Goals
T ABL E 11.1 Goals of supply chain management

W a s te By minimizing duplication, harmonizing operations and systems, and reducing

re d u c tio n inventories waste is reduced. For example, harmonizing materials handling
equipment reduces the need for loading and unloading components and also
creates economies of scale in purchasing equipment and containers.
T im e Improved information flows about market conditions enable supply chain
c o m p re s s io n members to predict demand more accurately and thus make response times
quicker. Also, preferred-customer status within the supply chain means that each
member responds more quickly to the needs of other members than to the needs of
n o n -m e m b e rs . R e d u c in g re s p o n s e tim e s im p ro v e s c a s h flo w fo r a ll m e m b e rs
because deliveries happen faster so invoices are paid sooner.
F le x ib le Ensuring flexibility in the supply chain means that all the members are able to
re s p o n s e adjust more quickly to changing market conditions. This can lead to major
im p ro v e m e n ts in c o m p e titiv e a d v a n ta g e .
U n it c o s t Good supply-chain management seeks to reduce unit costs, which will either
re d u c tio n allow the firms in the chain to make more money or will allow them to reduce the
price to the end consumer, which again offers a competitive advantage. Cost is
not necessarily the same as price: a customer operating a just-in-time
manufacturing system may accept a slightly higher price for receiving small daily
deliveries rather than paying a lower price for one large monthly delivery, because
the savings in terms of holding stocks will outweigh the extra outlay.
Opportunities enabled by SCM

Proper implementation of SCM helps to use the following strategic areas

to their full advantage:
1. Fulfillment:-
a) Ensure the right quantity at the right time.
b) It makes sure that the right quantities are ordered.
2. Logistics:
c) Keep the cost of transporting materials as low as possible consistent
with safe and reliable delivery.
d) Constant contact with its distribution team.
3. Production:
Ensure production lines
function smoothly.
4.Reduced Cost of
a. Inventory carrying cost
b. Internal and external
failure cost
c. Purchase cost
5. Revenue & Profit
No Sales are lost and
flexible to respond
unforeseen changes
 Implementation: Points to
keep in mind
• Recognize the difficulty of change.
• Prepare a blueprint for change that maps linkages among initiatives.
• Assess the entire supply chain from supplier relationships to internal operations
to the market place, including customers, competitors and industry as a whole.
 SUPPLY CHAIN Levels
• Supply Chain Design
Strategic • Resource Acquisition
• Long Term Planning (1 Year ++)

• Production/ Distribution Planning

Tactical • Resource Allocation
• Medium Term Planning (Qtrly,Monthly)

• Production Scheduling
• Resource Scheduling
Operational • Performance tracking
• Short Term Planning (Weekly,Daily)
Problems faced by supply chain Management

Issue Details
Distribution Number and location of suppliers,
network production facilities, distribution centers,
configuration warehouses and customers

Distribution Centralized versus decentralized, direct

strategy shipment, pull or push strategy
Information Integrate system and processes though
the supply chin to share valuable
information, including demand signals,
forecast
Inventory Quantity and location of inventory
management including raw materials, work in process
and finished goods.
SCM Challenges for marketing managers
• Customer value learning.
• Finding out what customers regard as valuable is complex in the global environment,
because supplying firms need to consider
• differing decision-making processes,
• differing decision-maker values,
• different importance rankings of service versus physical attribute values
• The value chain may span several different cultures, so that each link in the chain
must be considered separately as well as how it fits into the whole.
• Understanding customer value change.
• Customers often change what they value as changing circumstances dictate.
• Because changes happen at different times in different countries, customer value is a
moving target.
SCM Challenges for marketing managers
• Delivering value in a world of uncertainty.
• Because change is constant, and may even be accelerating, it is virtually
impossible to integrate the strategies of firms which are often thousands of
miles apart and being pulled in different directions by local changes in the
business environment.
• The customer value process.
• In order to meet the problems raised by the first three challenges, marketers
may need to shift from a functional toward a process orientation.
• This may be difficult, in that shareholders believe that they have invested in a
company rather than in a supply chain, which makes it difficult for the
process to be seamless.
 Bullwhip Effect
• Meaning: The Bullwhip effect or Whiplash effect is an observed phenomenon in
forecast-driven distribution channels.
• Because customer demand is rarely perfectly stable, businesses must forecast
demand in order to properly position inventory and other resources.
• Forecast are rarely based on perfectly accurate statistics.
 Factors Contributing Bullwhip Effect
Forecast Errors
Lead Time Variability
Batch Ordering
Price Fluctuations
Product Promotions
Inflated Orders
Methods Intended to reduce Uncertainty, variability, and lead time i.e.,
Just in time replenishment and strategic partnership
 Inventory: Bullwhip Effect
The magnification of variability in orders in the supply-chain.

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

•
Quantity

Quantity

Quantity
Order

Order

Order
Time Time Time

A lot of retailers each …can lead to greater …can lead to even

with little variability in variability for a fewer greater variability for a
their orders…. number of wholesalers, single manufacturer.
and…
Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Any cycle
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
Push vs Pull System
• What instigates the movement of the work in the system?

• In Push systems, work release is based on downstream

demand forecasts
• Keeps inventory to meet actual demand
• Acts proactively
• e.g. Making generic job application resumes today (e.g.: exempli gratia)

• In Pull systems, work release is based on actual demand or

the actual status of the downstream customers
• May cause long delivery lead times
• Acts reactively
• e.g. Making a specific resume for a company after talking to the recruiter
Push/Pull View of Supply Chains

Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Push-Pull boundary
Mission-Strategy-Tactics-Decisions
• Mission, Mission statement
• The reason for existence of an organization

• Strategy
• A plan for achieving organizational goals
• Tactics
• The actions taken to accomplish strategies
• Operational decisions
• Day to day decisions to support tactics
Life Strategy for X
X is an undergrad. He/ SHE would like to have a career in business, have a good
job, and earn enough income to live comfortably

Mission: Live a good life

• Goal: Successful career, good income
• Strategy: Obtain a master’s degree
• Tactics: Select a college
• Operations: Register, buy books, take courses, study, graduate, get a job
Linking SC and Business Strategy
Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

-Portfolio of products
-Frequent discounts Supply Chain Strategy
-Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

 Strategies:
Product Development
It relates to Technologies for
future operations (via patents)
and Set of products/services
• Be the technology leader
IBM workstations
• Offer many products
Dell computers
• Offer products for locals
Tata’s Nano at $2500=100000
rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Strategies
• Marketing and sales strategy relates to positioning, pricing and promotion of
products/services
• e.g. Never offer more than 40% discount
• e.g. EDLP = every day low price
• At Wal-Mart
• e.g. Demand smoothing via coupons
• BestBuy

• Supply chain management strategy relates to procurement, transportation,

storage and delivery
• e.g. Never use more than 1 supplier for every input
• e.g. Never expedite orders just because they are late
• e.g. Always use domestic suppliers within the sales season not in advance.
Fitting the SC to the customer or vice versa?

• Understand the customer Wishes

• Understand the Capabilities of your SC

• Match the Wishes with the Capabilities

• Challenge: How to meet extensive Wishes

with limited Capabilities?
Achieving Strategic Fit: Consistent SCM and
Competitive strategies
• Fit SC to the customer

• Understanding the Customer

• Range of demand, pizza hut stable
• Production lot size, seasonal products
• Response time, organ transplantation Implied (Demand)
• Service level, product availability Uncertainty for SC
• Product variety Implied trouble
• Innovation
for SC
• Accommodating
poor quality
Contributors to Implied Demand
Uncertainty
Commodities Customized products
Detergent High Fashion Clothing
Long lead time Emergency steel,
steel for maintenance/replacement

Price Customer Need Responsiveness

Low Implied Demand Uncertainty High

Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
Understanding the Supply Chain:
Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and product variety)

High

Efficiency frontier

Fix responsiveness Inefficient Impossible

Inefficiency Region
Low

High Low Cost in $

Why decreasing slope (concave) for the efficiency frontier?
Achieving Strategic Fit: Wishes vs.
Capabilities

Responsive
(high cost)
Gourmet dinner
supply chain
<High margin>

Responsivenes e of i t
n F
spectrum Zo e g i c
at
r
St

Lunch buffet
<Low margin>
Efficient
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Big retailers’ Strategy
• Wal-Mart: Efficiency
• Target: More quality and service
• Carrefour: International, ambiance

• K-Mart: Confused.
• Squeezed between Target and Wal-Mart
• Reliance on coupon sales
• Do coupons stabilize or destabilize a Supply chain?
• K-Mart and Sears merged in November 2004.
Now called Sears Holdings.
• K-Mart gets cash
• Sears gets presence outside malls
Controllable elements of SC
• Customer : Customer service is the product of all logistics activities. It relates to the service
effectiveness of the system in creating time and place utility. The level of customer service
provided by the supplier has a direct impact on total cost, market share, and profitability. Service
effectiveness has been shown to be the most important factor in third-party logistics supply, with
price in second place
• Order processing : This affects costs and customer service levels, because it is the starting
point for all logistics activities. The speed and accuracy of order processing clearly affects
customer service: this is particularly true in global markets, where errors or delays become
multiplied by distance, and by the time it takes to make corrections.
• Logistics communications : The way in which information is channeled within the distribution
system affects the smooth running of the logistics. For example, a good progress-chasing
system will allow deliveries to be tracked and therefore customer reassurance will be greater.
• Transportation : The physical movement of the goods is often the most significant cost area in
the logistics process. It involves the most complex decisions concerning carriers and routes, and
is therefore often most prone to errors and delays.
Controllable elements of SC
• Warehousing : Storage space serves as the buffer between production and
consumption. Efficient warehousing reduces transportation costs by ensuring that
(for example) containers are shipped full, and transport systems are fully utilized.
• Inventory control : This ensures that the correct mix of products is available for
customers, and also ensures that stocks are kept at a reasonable level to avoid
having too much capital tied up.
• Packaging : The purpose of packaging is primarily to protect the contents from the
environment and vice versa. It also serves as a location for some shipping
instructions, e.g. port of destination.
• Materials handling : Picking stock to be included in an order is potentially a time-
consuming and therefore expensive activity. Some warehouses have the capacity
to automate the system, so that robots select the products and bring them to the
point from which they will be shipped.
Controllable elements of SC
• Production planning : Utilized in conjunction with logistics planning,
production planning ensures that products are available in the right quantities
and at the right times.
• Plant and warehouse location : The location of the firm’s facilities should be
planned so as to minimize delivery times (and therefore minimize customer
response times) as well as ensure that the costs of buying or renting space
are minimized. This will often result in difficult decisions, since space near
customers is likely to be more expensive than space in (for example) remote
rural locations.