INDUSTRIAL PRICING

Characteristics of Industrial Pricing

Types of Price
Pricing Methods & Strategies
Competitive Bidding & Price
Negotiations
 Leasing
Characteristics of Industrial
Pricing
Price/quality assessment
◦ Technical nature of the product
◦ Conformance to specifications & performance of
the product
◦ Reliability in terms of supply
Elasticity of demand
◦ Derived Demand
◦ Not very sensitive to slight changes in price of the
products
Negotiations & Competitive
Bidding
◦ Bulk purchase
◦ Tendering
TYPES OF PRICES

Three types of prices used in



business markets.

 List price

 Net price

 Geographic pricing.


List Price
 List price for products is the maximum chargeable price.
 Not the actual prices paid by the customers. They form the
basis for charging the actual price.
 Quoting the list price is important because different
customers or intermediaries are offered different prices
for the same product as the prices are subject to
reductions due to discounts.
 The prices in the lists are updated periodically according to
company and market conditions.
 For instance, in the recent past, following the hike in iron
ore and coke prices internationally, Steel Authority of
India Limited (SAIL) increased the list price of all its flat
products by 5% and TMT bars by 3%. Essar Steel also
hiked their list prices by 3-5%.
 In another case, Sun Microsystems ,India offered huge
discounts on its list prices for the high end and low end
servers, aimed at the small and medium enterprises. In
Net Price
 The price arrived at after deducting discounts from the list
price is called the net price.
 The net price varies for different customer segments and the
quantum of goods
 Discounts are trade discounts, cash discounts, and
quantity discounts.
 Cash discount is related to payment. Buyer gets a 3%
reduction in the total price if the payment is made within 10
days of credit purchase (represented as 3/10 net 30).
 Quantity discounts are the discounts given by the
manufacturer in proportion to the quantity ordered.
 Quantity discounts are of two types - cumulative and non-
cumulative. Non-cumulative discounts are given on order by
order basis whereas cumulative discounts are based on
previous purchases also.
 Trade discounts may involve discount slabs for a particular
quantity of purchase to push the products.
 For example, if purchases are below Rs. 1 million, the discount
Geographic Pricing
 In geographic pricing, industrial marketers quote different
prices at different locations based on certain conditions
and norms.
 The price to be quoted in a particular region (state, country)
may depend on the volume and density of the product,
norms of industry, and transportation budgets.
 F.O.R Pricing: Irrespective of location of customer, price
remains same. E.g. Tata Steel has F.O.R pricing across a
state.
 Ex-Works Pricing : Price varies with location of
customer/destination. Delivery cost is added. E.g. ACC
follows a Ex-works pricing policy, freight borne by
customer.
 Freight Equalization: Sometimes the total freight cost is
shared by both the supplier and the buyer. This is called
freight equalization.
 The supplier assumes some part of the total transportation
PRICING METHODS

 Marginal pricing
 Target Return Pricing
 Cost plus Pricing


Marginal Pricing
 Marginal pricing is also known as contribution
pricing.
 In this method, a firm aims to maintain profits by
ensuring that the cost of producing each unit of
the product is just less than the marginal
revenue.
 The firm is said to be in profits if the marginal cost
of producing one additional unit is less than the
additional revenue received for that particular
unit when sold.
 In industrial markets, the marginal pricing method is
used in order to utilize additional manufacturing
capacity where selling and other administrative
expenses is absent.
 Industrial marketers use this method to recover the
variable costs that are present in the utilization of
the additional/idle capacity.
 Marginal price = Variable Costs + Contribution,
Target Return on Investment & Target
Costing

The market place determines the

selling price of the future product


The company determines the profit

margin they desire to achieve on thi
product.


The difference between the selling

price and the profit margin is the
target cost
Target Return Pricing
Targeted ROI

◦ Targeted ROI is the targeted operating

income divided by invested capital

◦ Invested capital is total assets of the

company i.e. long-term or fixed assets

plus current assets.

◦
Target Costing
 Operating Income = Total Revenues -Total Costs
 Target Operating Income/Unit
 = Target Selling Price –Target Costs/Unit
 A target operating income per unit is the operating
income that a company wants to earn on each unit of
the product.
 Target price leads to Target Cost
 A Target cost per unit is the estimated long-run
cost per unit of a product, when sold at the
target price, enables the company to achieve
target operating income.
 Target costing has widely been used in
Panasonic & Sharp in electronics industry,
Compaq and Toshiba in PCs, Tata Motors in
 Illustration

T O I = T R -TC
◦ Invested capital = Rs. 90,00,000
◦ Expected Sales Volume = 50,000 units
◦ Target Total cost/unit =Rs. 100
◦ Target Return of Investment (ROI)= 15 %
Ø Target Operating Income = 15% x 90,00,000
 = 13,50,000
Ø Target Operating Income/Unit = 13,50,000/50,000
 = 27
Ø Target Return Price = 100 +27 = 127
q Return on targeted total cost = 27/100 = 27%,
TROI =15%
q Don’t confuse the two returns
 Mark-Up Pricing/Cost Plus
Pricing
◦ Elementary method
◦ Add standard mark-up to sales/product cost
◦ Illustration:


Sales Mark - up
Cost - Plus
riable cost per unit (VC)= Rs.100
Variable cost per unit (VC)= Rs.100
xed Cost (FC)= Rs. 4,00,000
Fixed Cost (FC)= Rs. 4,00,000
pected Volume Sales (V) = 80,000
Expected Volume Sales (V) = 80,000
tal cost/unit = VC + FC/V
Total cost/unit = VC + FC/V
= 100 + 400000/80000 = Rs.105
= 100 + 400000/80000 = Rs.105
k-up of 20% on sales return
Mark-up of 20% on product cost
the mark-up price =
So, the mark-up price =105 +20% on 105
tal cost per unit/ (1- desired return on sales)
=126
05/1-0.2 )= Rs. 131.25
Pricing Strategies
COMPETITIVE
BIDDING
Competitive Bidding
 Competitive bidding is common in many industrial
business transactions.
 It is a process where the buyer assesses the prices
submitted by two or more competitive suppliers.
 The process of bidding mainly emphasizes the
lowest prices while at the same time expecting
standard quality and service.
 The suppliers not only offer the price rates but also
submit information regarding the product
specifications, quality, service, and delivery of the
products to the purchaser.
 The supplier companies require a well-designed
price strategy in order to win the contracts from
the purchaser.
Types of Bidding
 Purchases in industrial markets follow two types
of competitive bidding –

◦ Informal bidding
◦ Formal bidding – Open bidding & Closed
bidding
 The type of bidding done varies according to the
type of purchase made, and the investment
incurred.
 If the purchases are small and the expenditure
incurred is low, then the buyers prefer to go in
for informal bidding, where information is
 Informal bidding
 Informal bidding is the simplest form of
competitive bidding
 This method is generally adapted for simple
purchases involving low investments.
 The buyer contacts the sales personnel of
different suppliers in person, on the
telephone or by e-mail, and describes
what is specifically required in the product.
 The sales personnel discuss these
specifications with their companies and
estimate the prices.
 They then quote their prices either in person
or on the phone to the buyer.
 The buyer evaluates the various prices
quoted by the suppliers along with other
 Open bidding
 Open bidding is a method of competitive bidding where the
buyer and the suppliers engage in open negotiations
regarding various specifications of the requirement.
 Open bidding is adopted by buyers who need the suppliers’
assistance in product purchase as the buyer is not in a
position to define the specific requirements of the
product and the supplier tries to solve the problem by
understanding what needs to be done.
 Open bidding is mostly used in the hi-tech markets, where
the buyer has unique technological requirements.
 The supplier resolves the problem by taking ideas from
various buying centers and then negotiating on price,
delivery, etc.
 In open bidding, the procedure is formal with the buyer
specifying the last dates for tender submission, final
date of bidding process, etc.
 Open bidding provides scope for the information of one
supplier being revealed to the others as the negotiations
are open.
Closed bidding
 In closed bidding, the price offers of the suppliers are
in the form of sealed bids.
 They are disclosed on a particular date and the lowest
price bidder who meets all the
 specific requirements of the buyer wins the contract.
 In closed bidding, one supplier does not get to know
the information regarding the bids of other suppliers
till the date of disclosure.
 There are no open negotiations involved and the
buyer fixes a last date for submission of tenders.
Late submissions are not accepted.
 Punj Lloyds Ltd. procures many of its equipment and
machinery through closed tenders where bidders
have to bid in sealed covers.
 ONGC also allots turnkey projects through the closed
bidding process. They include erection of drilling
 Competitive Bidding
Procedure (1)
 Invitation to bid or request for proposal (RFP) is
sent to the selected suppliers.
◦ The proposal contains detailed information about
the buyer’s requirement, in the form of quantity,
service, terms and conditions regarding
purchase, and date and time of the bidding.
 Suppliers respond to the RFP by conveying their
willingness to bid. Purchasers usually hold a pre-bid
conference with the bidders to explain the details
about the purchase project and answer queries, if
any.
 In case of turnkey projects or supply of complex
machinery, the bidders also undertake field visits to
the purchaser’s premises.
 Suppliers at this stage submit a Technical Bid which
contains all the technical aspects of the product.
 The purchaser then requests for a quotation (RFQ)
 Competitive Bidding
Procedure (1I)
 The suppliers respond in the form of Financial Bids
(also called Price Bids) where they quote their
most competitive prices.
 Suppliers are also required to submit Earnest
Money Deposits (EMD) for a fixed amount to
the purchaser in the form of bank guarantees
where a bank gives an undertaking that it will pay
the earnest money deposit on behalf of the
supplier.
 If the buyer follows a closed bid procedure, then
the supplier with the lowest price quotation is
generally selected as the winner of the bid.
 If it is an open bid, then the suppliers are allowed to
compete with their most competitive prices
publicly.
Negotiations
 Negotiation is a process where the sellers and buyers
make a number of proposals and counter-proposals
before a consensus is reached.
 Negotiations are used to reduce future uncertainties in
the form of price fluctuations. Negotiations help in
maintaining stable prices over a period of time.
 For instance, the increase in the price of steel leads to
an increase in the price of auto components.
 If oil prices increase, the cost of transportation and the
costs of a host of other products increase. These
price changes are unforeseen and may affect the
businesses of both buyer and seller.
 Hence pre-negotiations for a fixed period, say, three
years, may help buyers and sellers in maintaining
constant prices or allowing the prices to move in a
pre-specified price band.
 Though price is the priority issue, other issues on
which buyers and sellers generally tend to negotiate
LEASING
 Leasing
A lease may be defined as a contract by which the
owner of an asset (the lessor) grants another party
(the lessee) the right to use the asset for a given
term in return for a periodic payment of rent.


 Advantages of Leasing
 Leasing serves as a cost-effective means of acquiring
an asset.
 Tax benefits of depreciation and interest deduction are retained by
the lessor, but are partially passed back to the lessee through
lowered rents.
 Leasing also provides technology related benefits.
 It allows upgrading if new technology hits the market or if the
existing equipment is unable to handle the new technology
development.
 Leases often require much less equity investment than
 bank financing.
 Since leases are contracts between two willing
parties,
Types of Leasing
 Financial Lease
 Financial leasing is a long-term or medium term
non-cancellable contract which is fully
amortized over the basic term.
 It implies that the lessee has to make
continuous payments to the lessor and these
payments are spread over the useful life of
the asset.
 Operating Lease
 Unlike financial leasing, operating lease is a
contractual arrangement which is short- term
and cancellable and the series of payments
made will not be fully amortized.
 In operating lease, the lessor has to pay all the
expenses and liabilities related to ownership
of the equipment.
Leading Players

üSREI International üShriram Finance

Finance ü
üTata Finance
üSundaram Finance ü
ü
üCholamandalam üCountrywide Finance
Finance
ü üCiticorp
üMahindra & Mahindra

üGE Capital