BUILDING STRONG PRICING, ADVERTISING, AND SALES STRATEGIES
The two hurdles to establishing a pricing are, first, the perception that pricing is too interdependent with other elements of the marketing mix and, second, difficulties in establishing pricing organization in the firm. Clearly, marketing strategy involves a wide range of elements such as target market selection, positioning, distribution strategy, product features and quality, many of which interact with price. Similarly, just as price affects and is affected by so many other elements of the marketing mix, a wide range of different functions within the company have a legitimate interest in pricing decisions. Pricing is inherently a cross-functional activity that involves people from several different departments. For this reason, many firms have a pricing committee which oversees the pricing process. Membership of the pricing committee is likely to include finance, accounting, marketing, sales, operations and senior management personnel. Each department brings its own perspective.
Intra-organizational aspects of pricing
Obstacles to the development of effective pricing strategies can arise from internal organization factors. Each department tends to have his own perspective on pricing decisions. The finance department often seeks to control the whole of the pricing process and tends to have a short term perspective. This can cause problems because marketing department may wish to sell one or two products at a loss in the short term for a variety of reasons. In general, the finance and accounting departments are far less inclined than the sales and marketing departments to respond quickly to competitor action and customer preferences. Clearly, although a concern for customers and competitors it is essential, it must be tempered by a realistic assessment of the impact of pricing decisions on the short- and long-term profitability.
The role of the sales force in pricing
The sales force has a particularly important role to play in mediating between the company and its customers with respect to pricing decisions. The conventional view is that since sales people are the closest to the customer, it follows that they understand the customer’s valuation of the company’s products offerings better and so they should have considerable delegated authority concerning pricing decisions, as long as the remuneration structure for the sales is based on profit and not on revenue. Firms that give salespeople the least pricing authority generate the highest level of gross margin. Factors which influence this:
- Salespeople tend to give discount to save time and effort involved in creative selling.
- Salespeople may not have sufficiently objective knowledge of the customer’s response to price.
- When salespeople are given more price discretion this may alter competitive behaviour in the market
- 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 significant, compared to the sense of satisfaction arising out of making the sale.
Salespeople should be given high pricing authority when the sales effort is relatively low or high, but should be given limited pricing authority when the sales effort is medium. When sales are easy to achieve the salesperson does not need to abuse the delegated pricing authority in order to make the sale; where sales are hard to achieve the salesperson needs to have extra pricing discretion as a tool in the armoury. However, in intermediate sales situations, limited pricing authority removes the possibility that the salesperson will take the easy route to making the sale and simply offer a discount.
Relational aspects of B2B pricing
The pricing effects of long-term buyer-supplier relationships
Research in business markets has suggested that there are both costs and benefits to suppliers from entering into long-term buyer-seller relationships with customers. The advantages or benefits arise from increased sales and greater sales stability, and from using loyal customers as a source of new product ideas, as a test-bed for new product development and as showcase accounts. In addition, long-term customers may be locked in to the relationship through high switching costs.
For costs on the other hand, customers that are willing to enter into such relationships may be particularly demanding and difficult to serve. They may demand short-term price concessions from the supplier while continuing to expect a long-term orientation, so it is not clear that the investment in the relationship pays an economic rate of return.
Supply chain pricing
Changes in the environment of global business have encouraged companies to concentrate on their core competencies and to outsource an increasing number of business activities. Under these circumstances, Supply chain becomes a critically important management process, and companies seek to build partnerships with preferred suppliers. When this becomes the case, the traditional role of price must change. Traditionally, pricing has been regarded as the way in which the value associated with a transaction is divided up between the buyer and seller. In this traditional view, price is seen as the means of dividing up a ‘fixed’ pie of value that is created during a business transaction, and the predominant approach to pricing is win/lose or a zero-sum game, meaning that if one party is better off than the other party must be worse off.
In supply chain pricing the various companies involved at the different stages of the production process are seen as collaborators in the production of an end product, rather than rivals in a single transaction. This is the concept of supply chain pricing. First, 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 a second, and subsidiary, question is how that value is distributed between members of the supply chain. A more collaborative approach to pricing will increase overall profitability.
Types of bidding process: four basic auction mechanisms
- English – (Most familiar auction) an ascending price auction in which the last remaining bidder receives the good and pays the amount of their bid.
- Dutch – Starts with a high public price and the price falls until the first participant finds the price low enough to submit a bid. The first bidder is the winner and receives the good at the price prevailing when the clock was stopped.
- First-price sealed-bid – Unlike the previous two salad-bid auction are not in real time, each bidder submits a bid and the bids are opened at a stipulated time. With this variant the bidder pays the price he bided for.
- Second-price sealed bid – The same is the previous, only here the highest bidder pays the second highest bid.
The internet auction is an important and fast-growing mechanism for facilitating B2B transactions. Major companies started to investigate the use of internet auctions in the mid 1990’s. General Electric was a pioneer in developing its own in-house auction site, subsequently, many other large firms have developed their own in-house auction site.
Internet auctions can be conveniently categorized into the English or the Dutch/reverse auction. In an English auction, the seller starts the bidding at a reserve price and the buyer offers higher and higher prices until no one is willing to offer any higher. Highest bid wins the auction.
A Dutch auction is a descending price-auction. The original meaning of a Dutch auction arose where a seller offered a good for sale at a very high, with that price gradually declining until a willing buyer could be found and a bargain struck. In the case of B2B commerce, buyers post a RFQ and sellers respond to the RFQ. A particular problem that can arise with reverse auctions is the winner’s curse.
Reverse auctions often take place in conditions of uncertainty, where the buyer nor the seller can be sure of the true costs of fulfilling the contract. If price is used as the most important measure, the winning seller will be the one who made the lowest estimate of costs, it is entirely possible that the seller underestimated the costs and therefore stands to make a loss on the contract – the winner’s curse.
The costs involved in buying and selling are lower, geographical proximity is no longer an issue and the time of the auction can be more flexible. You have two different endings of an auction: soft close and hard close. With soft close the bidding goes on as long as there is a substantial amount of continuing bids. With a hard close, the bidding ends at a stipulated time, so companies may use ‘sniping’ tactics (bidding in the last minute to win).
Ethical aspects of B2B pricing
Pricing is an aspect of the marketing mix within which ethical issues often arise. The principal ethical issues that arise concerning B2B pricing decisions are anticompetitive pricing, price fixing, price discrimination, and predatory pricing or dumping. Anticompetitive pricing occurs where a group of producers collude to raise prices above the level that would apply in a freely operating market. Companies may also feel tempted to enter into explicit price-fixing arrangements to reduce risks of price wars. Unethical pricing practices arise particularly in industries where competitive tendering is in common use. 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 is ‘the selling of exported goods in a foreign market below the price of the same goods in the home market’. There are two sides to this, one the one hand , it can be seen as an aggressive action that will cause harm to domestic industry, on the other hand, it is offering consumers lower priced goods.
Advertising is the dissemination of information by non-personal means through paid media where the source is the sponsoring organization. Advertisement is a mass communicating of information intended to persuade buyers to buy products with a view to maximizing a company’s profits.
Elements of Advertising
- It is a mass communication reaching a large group of consumers.
- It makes mass production possible.
- It is non-personal communication, for it is not delivered by an actual person, nor is it addressed to a specific person.
- It is a commercial communication because it is used to help assure the advertiser of a long business life with profitable sales.
- Advertising can be economical, for it reaches large groups of people. This keeps the cost per message low.
- The communication is speedy, permitting an advertiser to speak to millions of buyers in a matter of a few hours.
- Advertising is identified communication. The advertiser signs his name to his advertisement for the purpose of publicizing his identity.
Basic Objectives of an Advertising Programme
- To stimulate sales amongst present, former and future consumers. It involves a decision regarding the media, e.g., TV rather than print.
- To communicate with consumers. This involves decision regarding copy.
- To retain the loyalty of present and former consumers. Advertising may be used to reassure buyers that they have made the best purchase, thus building loyalty to the brand name or the firm.
- To increase support. Advertising impliedly bolsters the morale of the sales force and of distributors, wholesalers, and retailers. It thus contributes to enthusiasts and confidence attitude in the organization.
- To project an image. Advertising is used to promote an overall image of respect and trust for an organization. This message is aimed not only at consumers, but also at the government, shareholders, and the general public.
Sales promotion is the dissemination of information through a wide variety of activities other than personal selling, advertising and publicity which stimulate consumer purchasing and dealer effectiveness. It signifies all those activities that supplement, co-ordinate and make the efforts of personal selling and advertising more effective.
Sales promotion consists of diverse collection of incentive tools, mostly short-term designed to stimulate quicker and / or greater purchase of a particular product by consumers or the trade. Whereas advertising offers a reason to buy, sales promotion offers an incentive to buy. Sales promotion includes tools for consumer promotion (for example samples, coupons, prizes, cash refund, warranties, demonstrations, contest); trade promotion (for example buying allowances, free goods, merchandise allowances, co-operative advertising, advertising and display allowances, dealer sales contests); and sales-force promotion (for example bonuses, contests, sales rallies).
Sales promotion efforts are directed at final consumers and designed to motivate, persuade and remind them of the goods and receives that are offered. Sales persons adopt several techniques for sales promotion. Creative sales promotion can be very effective. It is the marketing manager’s responsibility to specify promotion objectives and policies.
According to American Marketing Association “ Those marketing activities other than personal selling advertising and publicity that stimulate consumer purchasing and dealer effectiveness such as display shows and exhibitions, demonstrations and various non-recurrent selling efforts not in the ordinary routine.”
Objectives of Sales Promotion
The basic objectives of sales promotion are:
- To introduce new products: To induce buyers to purchase a new product, free samples may be distributed or money and merchandise allowance may be offered to business to stock and sell the product.
- To attract new customers: New customers may be attracted through issue of free samples, premiums, contests and similar devices.
- To induce present customers to buy more: Present customers may be induced to buy more by knowing more about a product, its ingredients and uses.
- To help firm remain competitive: Sales promotions may be undertaken to meet competition from a firm.
- To increase sales in off season: Buyers may be encouraged to use the product in off seasons by showing them the variety of uses of the product.
- To increase the inventories of business buyers: Retailers may be induced to keep in stock more units of a product so that more sales can be effected.
The types of sales promotion methods may be grouped under three categories:
- Types of sales promotion directed at consumers.
- Types of sales promotion directed at dealers and distributors