CHAPTER – 6

MARKETING -STRATEGY IN INDUSTRIAL MARKETING

PRODUCT AND PRICING STRATEGIES

This chapter should enable you to understand and explain: Industrial product strategy o
Industrial pricing strategy Industrial channel strategy Industrial promotion strategy

1. Industrial product strategy

In this sub topic we are going to discuss industrial product planning and development strategies
and the importance of product planning and development.

1.1. Product planning and development: product is anything that can be offered to a market
for attention, acquisition, use, or consumption that might satisfy a want or need.
Customers buy solution, not the product. Product planning and development is the
continuous process of recognizing customers need to develop and deliver superior
customer value to satisfy customers and hence achieve organizational objectives.
Product planning and development strategies include:
a) Meeting/customizing buyers’ product specifications
b) Product decisions strategy: which includes product attributes (Product feature,
product quality, product style, and product design), branding, packaging, labeling,
and product support services.
o Product attribute strategies: includes product quality, product feature,
product design, and product style.
 Product quality: this is when buyers’ expectations of the product are
satisfied (product specifications are met) by the
products performance. Total Quality Management (TQM) is an
approach in which all of the company’s people are involved in
constantly improving the quality of products, services, and business
processes.
 Product features: these are more functional uses of a given product
or service. Features are a competitive tool for differentiating the
company’s product from competitors’ products.
 Product design: this is new model/version of a given product. It is
upgrading of a product’s feature.
 Product design: this is the eye catching (aesthetical) part of a
product. It is expressed in terms of color, shape, and size of a given
product.

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It is very important to incorporate all product attribute strategies in the business product strategy
(except the color of the product which is more of emotional) to meet the buyers’ expectations.

o Branding strategies: a brand is a name, term, sign, symbol, or design, or a

combination of these, that identifies and differentiate the maker or seller of
a product or service (an offering from a known source). Brand equity is
when a brand that has strong positive brand image (brand associations in
buyers’ mind) in a consumer’s long term memory and commands
consumer preference and loyalty (a pattern of repeat product purchases or
loyalty).

Industrial products generally are identified by a corporate family brand, such as caterpillar
tractors. Businesses use corporate brand name (individual brand name together with the
manufacturers’ or distributors’ name) to minimize potential purchase related risks.

o Packaging: it involves designing and producing the container or wrapper

for a product. For business buyers protection aspect of packaging is more
important than promotional aspect of packaging. o Labeling: this is
printed information appearing on or with the package. Labeling identifies
the product/brand, describe (who made the product, where it was made,
when it was made, its contents, how it is to be used, and how to use it
safely) the product, and promote the product through attractive graphics.
o Product support services: these are customer services that augment the
actual product. Customer services are very important considerations of
industrial buyers. It includes:
 Spare availability
 Product training
 Credit and financing
 Fast and reliable delivery
 Repair and maintenance
 Installation
 Warranty
 Quality assurance etc.
c) Product line (category) decision strategy: Product line (PL) is a group of
products/categories that are closely related because they function in a similar
manner, have similar costs, are sold to the same customer groups, are marketed
through the same type of outlets, or fall within a given price ranges. PL strategies
include:
 PL filling: this involves adding/lengthening more items within the present
range of the line.

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  PL stretching: this is when a company lengthens its product line beyond its
current range – downward, upward, or both ways stretching. Downward
stretching is adding cheaper items to the existing line whereas upward
stretching is adding expensive items to the existing lines.

This enables the company to become a full line company – it involves offering a complete
package of products and services. Industrial buyers will save time and cost by having their
requirements at a place/one stop shopping (solution purchase). Industrial product line will
include (defined) the following:

 Proprietary or catalog products: these include standard product offering (Do All
company) made and usually inventoried in anticipation of sales order.
 Custom-built products: these are made-to-order options to complement the proprietary
products offered.
 Custom-designed products: these include one-of-a kind units, customized for a
particular user or small group of users (e.g., custom-designed products for the country’s
army).
 Industrial services: with a service the buyer is purchasing an intangible, such as
maintenance, machine repair, or warranty.
d) Product mix decision strategy: a product mix (PM) or product portfolio consists of
all the product lines and items that a particular seller offers for sale. PM strategies
include:
 Product mix width: the number of different product lines the company
carries.
 Product mix length: the total number of items a company carries within its
product lines.
 Product mix depth: the number of versions offered for each product in the
line.
 Product mix consistency: refers to how closely related the various product
lines are in end use, production requirements, distribution channels, or some
other way.

Determinants of the product mix in business market will include the following:

Technology: in many industries new technology can cause a product to become obsolete
virtually overnight (a prime example is the electronics industry).
Competition: a change in competitor’s product mix could represent a major challenge.
Changes in the level of business activity: many firms expand their total product offering
by adding product lines having different seasonal pattern/variations.

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 Operating capacity: a business-to-business firm often will expand its product mix if it
discovers underutilized capacity in any part of its operations (e.g., the sales force could
handle more other lines to handle if they have extra idle time).
Market factors: a change in the business buyer’s product mix, due to competitive action
or technological innovation, could present an opportunity to sell additional quantities of
various products or an opportunity to capitalize on additional business. e) New product
and new product development process
o New products: are generally those products that a give market is not familiar with it
before. It includes the following:
 Innovations: technological breakthrough first to the world products.
 Significant modifications/improvements: this is a change in the chemistry or
anatomy of the product-instant/prepared coffee replaces the usual brew/make
coffee.
 Minor modifications: this is revisions or line extension which is a change in
color, shape, size, flavor, and new package.
 New to the market
 New to the company
 Imitative/copied products
 Repositioning existing products to new markets
 Cost reductions: price changes

Forces/causes of having new products include technological advancement, aggressive

competition-rapid market saturation, and changing customers’ requirements (taste and
preferences). New product can be developed through two approach-technology push process and
market pull process.

 Technology push process: this is ‘’supply creates demand’’ approach of new product
development. A growing number of customers buy for reasons of availability, novelty,
and price, even if the benefits are not fully defined. Most telecom products and services
start with technology push phase. The new product idea comes from the
manufacturer/marketer. But, the new product is tested in the market later.
 Market pull process: it is primarily the result of marketing research methodologies of
interviewing potential users about their needs and then developing solutions to meet
those perceived needs. It carries the least business risk because there is less chance that
the developed product cannot be sold.
New products are important for the following reasons:

• They bring new solutions and variety

• They are key sources of growth
• They help to rejuvenate/revive the decreasing sales and profits of existing products

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 • They are a strategic response to competition
• They help to update fashion
• They help to exploit market opportunity

But on the other hand new products failed because of the following reasons:

• Inadequate market analysis

• Product defects
• Higher costs than anticipated
• Poor timing
• Competition and advancement in technologies
• Insufficient marketing effort (inadequate sales and weakness in distribution) etc.

Organization of the new product effort: involves a complex structure of line and staff
relationships, with several departments involved in the development of new product ideas. The
following are the major organizational arrangements for new product development:

 Product manager: this is effective organizational forms for multi-product firms. The
manager is responsible for all undertakings of the marketing effort for the success of the
product. Product managers in the business market often are considered to play a role
equivalent to that of brand managers in the consumer market.
 New product committee: this comprises representatives from marketing, production,
accounting, engineering, and other areas that review new product proposals on a part time
basis. A disadvantage to this type of organization is that departmental priorities might
supersede those of the committee. On the other hand the advantage is that there will be
pooling of resources.
 New product department: this generates and evaluates new product ideas, directs and
coordinates development work, and implements field testing and pre-commercialization
of the new product. It incurs major overhead costs in the process.
 New product venture team: unlike new product committee, this team represents various
departments and gives responsibility for new product implementation to a fulltime force.
But the venture team normally is dissolved once a new product is established in the
market.
The product adopting - diffusion process: this is how quickly prospects will adopt/accept a
new product and to what extent it will be accepted as a replacement for the old. Stages in the
adoption process:

 Awareness: the buyer first learns of the new product or service, but he/she knows little
about it. The marketer need to provide sufficient information and educate the market to
minimize perceived risks of having new product and hence increase the rate of
acceptance.

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  Interest: the buyer might seek out additional information about the product or service.
 Evaluation: the buyer considers whether the new product or service would be useful.
 Trial: this is making a trial/sample purchase in order to evaluate carefully the
correctness of the decision to buy. Less expensive and less complex products might be
distributed as free samples, with the goal of inducing prospects to try the new offering by
reducing their perceived risk.
 Adoption: this is deciding to use the product regularly.

Factors influencing the rate of adoption – diffusion: these factors will include

 Perceived advantage and perceived risk (e.g., incompatibility with existing products)
 Technological uncertainty (considerations like production capacity,
rate of technological obsolescence, etc.)
o New product development process: the stages in new product development process
include:
 Idea and concept generation: this is the search for new product idea. Sources
will include:
 Customers
 Suppliers
 Distributors
 Extension of current products Lessons from past projects Brand
extensions etc.
 Screening and evaluation: this is spotting good ideas and dropping poor ones.
The following variables need to be considered while screening of new product
ideas:
 Access to the necessary raw materials
 Financial capacity
 Synergy with existing product lines
 The market (current or new buyers)
 The sales team (new sales team or existing sales force)
 Impact of the new product on existing products The production
facilities etc.
 Business analysis: this is expanding the idea or the concept through creative
analysis into a ‘’go’’ or ‘’no go’’ recommendation. It includes the likely:
 Demand projection/sales forecasting
 Cost projections
 Competition
 Required investment

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  Profitability Break-even analysis
 Discounted cash flow etc.
 Prototype product development: sample product is produced.
 Product testing/market testing: testing takes place both in the laboratory and in
the field (market testing). Functional tests are carried out in the laboratory.
Market testing to indicate the product’s performance under actual operating
conditions, the key buying influencers, reactions to attractive price and sales
approaches, the market potential, and the best market segments to pursue.
Business marketers use product use tests and trade shows, along with
distributor and dealer display room.
 Product commercialization and introduction: involves launching the new
product through full-scale production and sales.
f) Product Life Cycle (PLC) strategies: PLC is profitability (sales and cost) trend of
each product or group of products across time. PLC in business marketing is very
short because of fast advancement of technology and this increases the rate of product
obsolescence. Because of this replacement cost for business buyers is high. Product
strategies across PLC will include:
• Product development/pregnancy stage: this is the new product development
processes from idea generation up to product testing. This stage involves
high cost of product development.
• Introduction stage: a single version of basic product will be produced and
introduced to the market in order to manage low rate of new product
acceptance-high cost of promotional expenses.
• Growth stage: in this stage because of increased amounts of competition the
marketer need to introduce more versions/models of the product.
• Maturity stage: the company needs to launch the full version of the product
and become a full-line company.
• Decline stage: here the company needs to phase out weak items (withdraw or
divest or sell unprofitable items) and have the best sellers only.
1.2. Importance of product planning and development: product planning and development
is important because of the following reasons:
Increased competition – customers will not continue to buy existing products if better
competitive choices come along in the market. Thus, the manager must keep pace with
competition.
Derived demand – this is an era of ultimate consumer wants and needs are changing faster
than they ever did before, and this has defined effects on the demand for industrial goods
and services used to produce goods sold in to the consumer market.
Greater sophistication in industrial purchasing – as buyers become more knowledgeable,
they become pickier in relation to competitive choices open to them. Thus suppliers need

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 effective product planning and development to supply the buyers and buying influence
with products that satisfy their particular requirements.
Laborsaving requirements – buyers are now constantly looking for labor savings in their
equipment and materials purchases. Hence, the supplier should plan, develop, and
provide products accordingly.
Energy saving requirements – manufacturers (buyers) are constantly seeking products that
will reduce energy consumption in their manufacturing process (economy in their
purchasing of required equipment, parts, and supplies) etc.

2. Industrial pricing strategy

2.1. Definition and importance of pricing

Price is the amount of money charged for a product or a service. It is the sum of all the values
that customer give up (pays) to gain the benefits of having or using a product or service. Pricing
strategies generally have the following importance:

o To produce a proper product for a market segment o To get it into an

effective channel of distribution o To promote it in an effective manner o
To get market acceptance for the product o To offset competitive thrusts
when price competition play a major part o To determine the firm’s
revenue and financial position in general

The following variables show us that price will be more important to the buyers:

 The item is offered for the first time (new task buying)
 The company needs to raise price (thereby initiating a modified re-buy)
 Competitors reduce price (and try to win away the company’s customer)
 The buyer supplies a government agency that has a cost-of-purchase orientation
The following variables show us that price will be less important to the buyers:

 The item is bought on a regular basis (straight re-buy)

 The seller has a high/unique reputation and the risk, cost, or difficulty created by product
failure is high.
 The cost of the item is insignificant relative to the buyer’s budget
 The purchase represents an overhead or indirect cost to the buyer
 A governmental customer’s budget has not yet been appropriated
 Product training is required
 There is uncertainty about a product performing satisfactorily.

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 2.2. Factors affecting (influencing) price strategy

Factors affecting pricing includes the following:

 Competition and the nature of the market: this includes

 Competition from directly comparable products (substitute products)
 The reaction of competitors to any price move the business marketer may make.
The competitive market structure in business market is oligopoly (few suppliers
being the buyers are the marketers in industrial marketing). In an oligopoly
market price changes initiated by one firm are likely to invite price retaliation.
Marketers of cellular telephone services fit this category, as do petroleum
refiners, and manufacturers, steel, and tobacco.
 Costs of running the business: this includes all fixed expenses (expenses that do not vary
with the level of sales and production) and variable expenses (expenses that vary with the
level of sales and production). Companies with lower cost can set lower prices that
result in greater sales and profits. On the other hand, if fixed and variable
costs/expenses are relatively higher than the competition, the marketer may be in no
position to reduce its price because such action can lead to a price war that it will
probably lose.
 Demand for the product: whereas cost set the lower limit of prices, the market and
demand set the upper limit. Industrial buyers balance the price of a product or service
against the benefits of owning it. Hence industrial marketers must understand
 How products are used
 Determine product values (benefits) from the customer’s perspective
 Examine the cost of owning and using the products, and Price sensitivity

Industrial buyers view price as relatively unimportant in comparison with such supplier
attributes as assurance of stability in product specifications and reliability in consistently
meeting delivery dates. But if the purchase involved a major new-buy situation, however, or
when the quantity to be bought is large enough to make price will be a major buying
determinant. Whereas, industrial marketers are price sensitive. They need to have the right
competitive advantage through pricing.

 Impact of pricing on other products: new product addition on existing product line will
weaken sales of the previous product (cannibalization).
 Pricing objectives: this will include like maximizing profit, expand and maintain market
share/position, achieve a target return on investment (ROI), achieve rapid cost recovery,
support corporate imagery, match-lead-or follow competitors, discourage entry of
competitors, achieve or complement product differentiation, stabilization of price and
margin, etc.
 Legal consideration: from legal point of view industrial marketers should avoid:

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  Price fixing (collusion): secret price-output determination in oligopoly market.
 Exchanging price information: it is when competitors exchange information
regarding prices, inventory levels, and the like. It becomes illegal when it leads to
price agreements, however, as this is tantamount to price fixing.
 Predatory pricing: cutting of prices (usually by a larger producer) to a point that
is at or below cost for the purpose of eliminating competition. It is an attempt to
monopolize the market and, in most cases, is illegal.
 Government regulations: this is different tax and other legislation that will affect
pricing.
2.3. Price elasticity of demand (e)

Elasticity is the relative change in the dependent variable (quantity demanded) divided by the
relative change in the independent variable (price).

e = (IQD – NQD)/IQD/ (IP – NP)/IP, where IQD = Initial Quantity Demanded, NQD = New
Quantity Demanded, IP = Initial Price, and NP = New Price. There are three cases with this
formula:

• Elastic demand (price sensitivity – where e>1): when a small percentage decrease in
price produces a large-percentage increase in quantity demanded. With elastic demand,
total revenue increases when price decreases but decreases when price increases.
• Inelastic demand (price insensitivity – where e<1): when a small percentage decrease in
price produces a smaller percentage increase in quantity demanded. With inelastic
demand, total revenue increases when price increases and decreases when price
decreases.
• Unitary demand elasticity (where e =1): when the percentage change in price is
identical to the percentage change in quantity demanded. With unitary demand, total
revenue is unaffected by a slight price change.
The following are factors affecting price elasticity of demand:

 The availability of product substitute

 Whether the products are necessity or not, etc.
2.4. Pricing methods (price-setting theory)

Generally enough revenue to cover costs is a function of having a competitive cost structure as
well as sufficient demand. The following are pricing methods:

 Marginal (contribution) pricing: firms accomplish profit maximizing goal by

determining price where the extra revenue received from selling the last unit of product is
equal to the cost of producing it (pricing at marginal revenue ≥ marginal cost).
Maximizing profits by producing the number of units at which marginal cost is just less
than, or equal to, marginal revenue.
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 Economic value to customer pricing: this is pricing by analyzing the products’
economic value to the customer (EVC). The economic value of a product to a business
buyer is based on such factors as:
 Purchase price/cost
 Additional post-purchase costs such as training or retaining of employees
 Costs associated with installation, modifications; and
 The products ability to raise profits
 Cost – plus pricing: firms set prices on the basis of cost plus a ‘’fair’’ profit percentage.
It pays little attention to the demand side of the market. It also disregards the actions of
competitors and places inordinate attention on a firm’s historic costs.

Unit cost (UC) = Variable Cost (VC) + (Fixed costs (FC)/Unit Expected Sales (UES))
Markup price = UC/ (1 – Desired Return On Sales (DROS))
 Break-even pricing: used to determine the level of sales required to cover all relevant
fixed and variable costs. It also identifies the minimum price below which losses will
occur. It involves estimating a relationship between cost and output, and computing
relationship between revenue and output at various prices. Break-Even-Point (BEP) is the
‘’no-profit’’, ‘’no-loss’’ point or a point at which losses cease and profits begin.

BEP is calculated at the point TR = TC

BEP = FC/ (Unit Price (UP) – UVC)
Illustration-1: assume the marketing manager wishes to price component parts at birr 25
each. Given fixed costs of birr 400,000 and variable costs of birr 10 per unit, how many
units must be sold to breakeven?
Solution: at breakeven: total revenue = total costs
PQ = TFC + TVC
25Q = 400,000 + 10Q
25Q – 10Q = 400,000
Q = 26,666 units
If the manager drops price to birr 20 per unit and costs remain the same, he/she must sell
40,000 units to breakeven. Given those same costs and a price of birr 30 per unit, he/she
must then sell 20,000 units to breakeven.
Break-even price: the break-even price for a given volume of output can be calculated
by dividing the sum total of fixed costs and variable costs by the quantity of output.
Illustration -2: if FC = 1,000,000, VC = 2 per unit, Quantity (Q) = 50,000. Then Break-
Even Price (BEP) will be calculated as follows:
Break-even price = FC + VC/Q = 1,000,000 + (2 x 50,000)/50,000 = 4 per unit.
 Target Return on Investment Pricing (TRP): it is a method of setting prices to achieve
such an investment goal (like ROI of 20%); it is one of the most widely used methods of
establishing price strategy. Target costing is identifying a product’s desired features

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 based on market research and its likely selling price (cost = Target Selling Price (TSP) –
Desired Profit (DP)). Zero Based Pricing (ZBP) is the practice of business buyers
demanding a cost breakdown to justify a price increase by a seller. TRP = UC +
(DROS x IC (Invested Capital))/UES)
2.5. Pricing strategy
a) Pricing over the PLC:
 Introduction stage: the pricing strategies are price skimming and market
penetration pricing. Price skimming is when prices starts high and slowly drop
overtime. Conditions for price skimming:
 The buyer should be risk taker and who welcomes new products
 The supplier has a patent or hand-to-copy innovation
 Variable costs are a high proportion of the total costs
 The high initial price does not attract more competitors
 The usage of the market is limited
 Enough buyers have high current demand
 The high price communicates the image of a superior product

Market penetration pricing is setting a low price for a new product to attract a large number of
buyers and a large market share. Conditions for penetration pricing:

 With heavy fixed costs and low variable costs

 Many close substitutes are available; thus, a low price discourages
competitive entry
 Customers are very conservative and traditional, and are unwilling to
take risks
 The product is easy to copy and there are few barriers to entry by the
company’s competitors
 The market exhibits a high price elasticity of demand (high price
sensitive customers).
 Growth stage: price to penetrate the market.
 Maturity stage: competitive parity pricing (pricing to match or beat competitors).
 Decline stage: pricing the product at cost, or even under cost – loss leader pricing
(predatory pricing).
b) Product line pricing: this is pricing by considering demand (complementarily and
substitutability of products) and cost (joint costs, bundling possibilities, and
cannibalization).
c) Trade discount: it is trade discounts are reduction from list price that are given to
different groups of intermediaries or customers according to the image of functions they

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 perform (stocking, advertising), the type of market to which they sell (OEM, retailers),
and the volume in which they purchase. Net price = list price – one or more discounts.
d) Cash discounts: a discount given to encourage early payments of credit (e.g., 2/10, net
30, meaning that if the invoice is paid within 10 days, an additional 2% can be deducted
from the price).
e) Quantity discounts: this is discount given to encourage the customer to order in large
quantities. Quantity discounts can be Non-cumulative discounts which is given on an
invoice/order by order basis or cumulative discounts which is given on the sum of
several previous invoices.
f) Geographic pricing: the choice depends on:
• Location of the competitor’s plants
• The bulk and density of the product
• Location of key customer accounts
• Industry norms
• General competitive conditions, and
• The proportion of total price that transportation costs contribute.

Geographic pricing includes: FOB/Free On Board/ factory pricing, FOB destination, and
CIF/Customs, Insurance, and Freight).

 FOB factory pricing: the buyer pays the invoice price plus the cost of freight.
 FOB destination: the supplier assures the cost of freight and charges only the remaining
portion to the customers.
 CIF: it includes FOB factory price plus all domestic inland charges and all ocean or air
transportation and ancillary costs.
2.6. Major areas of industrial pricing

This includes competitive bidding, leasing, and negotiation.

 Competitive bidding: this is invitation of suppliers/buyers to negotiate for the best

combination of quality, service, and price. A price setter often is required to submit a
performance bond along with the bid to assure that quality and service will not suffer due
to the emphasis on price. There are generally two types of bidding:
 Closed bidding: consists of sealed bids, with the lowest bid usually winning
the contract.
 Open bidding: this allows negotiation and often is used when there is much
flexibility with regard to buyer specifications.
 Leasing: this is long term renting of property. Leasing can provide a very viable
alternative to buying capital equipment. The lessee is the party that acquires the right to
use the property, plant, or equipment. The lessor is the party that relinquishes the right in

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 return for some form of considerations. Leasing has the following advantages for the
lessee:
 No down payment
 No risk of ownership/obsolescence

Leasing on the other hand has the following advantages for the lessor:

 Increased sales
 Ongoing relationship with the lessee
 Residual value (ownership) retained in the hands of the lessor

Types of leasing – operating lease and direct financing lease. Operating lease has the
following characteristics:

• Operating lease is short term and cancelable.

• The lessor provides maintenance and service, and the lease will not contain a
purchase option.
• The lessor retains substantially all the risks and benefits of ownership.
• The lessor gives up the physical possession of the asset, but the transfer is
considered temporary in nature

Direct financing lease on the other hand has the following characteristics:

• It is long-term, non-cancellable, and fully amortized (transfer right) over the

period of the contract.
• The lessee is responsible for operating expenses and is usually given the
option of purchasing the asset; often, a portion of the lease payments will be
applied toward the purchase of the asset.
 Negotiation/open bid/: this is discussing to reach a mutually satisfactory agreement on
services, technical assistance, delivery terms, product characteristics, and quality.

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