negotiating price2

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The MAANZ MXpress Program Negotiating Price Dr Brian Monger Copyright January 2013. This Power Point program and the associated documents remain the intellectual property and the copyright of the author and of The Marketing Association of Australia and New Zealand Inc. These notes may be used only for personal study associated with in the above referenced course and not in any education or training program. Persons and/or corporations wishing to use these notes for any other purpose should contact MAANZ for written permission. MAANZ International 1

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Page 1: Negotiating price2

The MAANZ MXpress Program

Negotiating Price Dr Brian Monger

Copyright January 2013.

This Power Point program and the associated documents remain the intellectual property and the

copyright of the author and of The Marketing Association of Australia and New Zealand Inc. These

notes may be used only for personal study associated with in the above referenced course and not in any

education or training program. Persons and/or corporations wishing to use these notes for any other purpose

should contact MAANZ for written permission.

MAANZ International 1

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MAANZ International

• MAANZ International, is a Not for Profit, internet based professional and educational

institute which has operated for over 25 years.

• MAANZ International offers Professional Memberships;

• Marketing Courses (Formal and Short)

• And Marketing Publications

• www.marketing.org.au

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Negotiating Price

• In many instances, customers do not pay a standard list price.

• Instead, the final price is determined through a process of negotiation between buyer and

seller.

• The negotiation process becomes necessary when neither of the parties to a transaction

has the power to impose its own will over the other(s).

3 MAANZ International

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A Word about Price and Value

• The Oxford English Dictionary refers to value as `an estimate of worth or utility', which

would indicate that value is the outcome of some sort of assessment or estimate.

4 MAANZ International

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Marketing as an Exchange of Value

• What is a market transaction all about? In essence it's about exchanging value. There must be something of value created by the

seller, offered and exchanged with something of value from the buyer.

• Customer value is represented in a series of trade-offs between what the customer gives

relative to what they receive. 5 MAANZ International

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Creating Customer Value

• The job of any market-driven organisation is not to sell a product, but instead to create

value for customers.

• Value creation, is the source of competitive advantage in the marketplace.

• The fundamental purpose of any business is to create value where there was none before.

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Marketing as an Exchange of Value

•Various authors have provided variations on this simple approach such as:

•A trade-off between product quality and the price

• A trade-off between a set of benefits and specific categories of costs

• The hierarchy of derived benefits obtained from particular product attributes when using the product

• The resulting emotional, practical and logical worth associated with the product

•A trade-off between received value and desired value

• A customer makes investments in order to achieve a number of desired benefits. Similarly organisations also make a series of investments in order to achieve a series of designed benefits and outcomes.

• The actual set of benefits they both get out the exchange must be weighed against their investments.

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Pricing Problems are Universal

• For marketing strategists, Pricing is the moment of truth. All of marketing comes to

focus in the pricing decision.

MAANZ International

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The Universal Approach is Simply Wrong

• One of their main problems is that they are not marketers and do not understand why

they should be.

• It is up to the marketer to understand why their target segments buy. Even if the physical

product is the same (eg 2 airlines) some simply prefer one over the other

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• Some like an organisations positioning/attitude (Virgin/Body shop) If you can develop a preference you can charge more

for it. You may choose not to charge more - but the objective of marketing is to increase

the preference.

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The Universal Approach is Simply Wrong

• Recent significant price rises in petrol showed that the industry wasn't anywhere near as

price sensitive as was once considered.

• I personally would fire any so called marketer who couldn't add value and get a better price

than the industry norm.

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Not Everyone Wants the Lowest Price!

But Everyone Wants the Best Value

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Not Everyone Wants the Lowest Price!

• There are many elements that can increase the value in any transaction (for both parties). That is, everyone gets better value out of the deal. Low

prices are seldom going to be able to provide much in the way of added value.

• When a marketer offers a low price, the profit margin per item falls. Perhaps an increase in volume will compensate for this. However, the

closer a price comes to breakeven (costs V income) the less value there will be for all concerned.

• The seller is closer to going broke and cannot offer any increased value to the buyer. If in fact they do go broke, the buyer has to find another

supplier.

• A strategy that has an over-reliance on price-cutting is an overly simplistic strategy. It is the easiest strategy for a rival to copy and the hardest

strategy to defend.

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• Industries that have firms focused on the belief that lower pricing is the strategy of

success will tend to develop price wars. Very low prices price lead to low margins per unit. Unless this is off-set by high volume (which is

becoming rarer in most markets) organisations and ultimately their customers will suffer.

• It is in every-ones interest

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• A firm with very low margins cannot undertake value adding activities or develop new products. Ultimately they will try to cut costs in areas that buyers consider core value

areas, and lose customers. Firms with low margins are always that much closer to going broke (with the resultant effect on suppliers, intermediaries and employees - not only the

owners).

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• Good marketing is not about lowering prices (any fool can do that really!). The job of a good marketer is to increase margins and deliver better value (not less) to buyers.

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To the purchaser, there are a number of ‘costs’

to be considered as part of the payment. They

include:

•Time Investment.

•Risk

•Opportunity costs What would be the best use of my money

at the present moment?

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The Lowest Price Is Likely to be the Worst Thing You Can Do

• The lowest price is usually bad for everything:

• Poor strategy

• Poor profitably

• Selling costs may rise

• Poor marketing

• Bad for brand image

• Makes future sales harder

• Defeats true loyalty

• A Low price focus is an exercise in stupidity

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Negotiating Price

• Do nots

• 1. Do not start with the belief there are no options.

• 2. Do not start with the price

• 3. Do not start with a low price and then follow-up with a discount

• 4. Do not create prices using only a cost based focus.

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Negotiating Price

• Do’s

• Start with a value based concept – not a cost based one

• Understand why buyers buy – It is always VALUE

• Understand value from the customers point of view

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Price Is A Creative Variable

Implicit in the argument that price must reflect value is the

need for flexibility in the methods used to establish prices.

"price is a variable.”

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Price Is Just One Element Of Your

Marketing Mix

Pricing is but one of the four strategic elements comprising the

marketing mix.

If marketers are to meet consumer demand profitably, they

cannot afford to reduce their relationships with their markets to

simple price-quantity terms.

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The main care must be to tailor prices to market requirements,

and present them to those markets as integral parts of

appealing composite offers and strategies.

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The underlying reason for much of today's ineffective pricing

is a preoccupation among those who set prices with the need

to cover costs.

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Costs and Buyer Evaluation

• A fundamental principle in market-based strategic pricing is to recognise that price is a statement of value, not a statement of costs.

One of the leading causes of new-product failure is a phenomenon of "price crunch." This is the situation where the firm charges a price that is significantly higher or lower than the

amount of value buyers associate with a particular purchase.

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It is reasonable to accept the economic axiom that prices paid

tell us something about consumer evaluations of products.

(i) the traditional demand theorem that 'the lower the

price, the greater the sales'.

(ii) the premium-pricing dictum: 'the higher the price, the

higher the customer valuation - so, the greater the sales'.

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Why Do buyers Buy?

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Understanding Buyers

• 1. Not everyone is the same – that’s why we segment and target.

• Understand the Price mind set (it affects both buyer and seller)

• The value for some customers is in “out negotiating” you. They just want to win.

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Value

Buyers' interest in price stems from their expectations about

the usefulness of a product or the satisfaction that they may

derive from it.

Because buyers have limited resources, they must allocate their

buying power so that they can obtain the most desired

products.

Buyers must decide whether the utility gained in an exchange

is worth the buying power sacrificed.

MAANZ International

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Price And Value

A fundamental principle in market-based pricing is to

recognise that price is a statement of value, not a statement of

costs.

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Best Value.

The best value is the one that provides the most benefit (in

terms of the customer's desired set of attributes) for the least

price.

Value represents a buyer's overall evaluation of the utility of a

product based on perceptions of the net benefits received and

what must be given up.

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The amount that an organisation charges is both a determinant

and a reflection of the amount of value a buyer receives.

Price determines value because the customer is comparing the

benefits gained to the price given up (e.g., value for the money).

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Price also reflects or is a statement of value in that higher (or

lower) prices should correspond with more (or less) valuable

benefit packages.

Value Is Perceptual

A common mistake made by managers is to confuse actual and

perceived value.

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Product value, like product quality, has no

clear meaning except in terms of the needs of

particular customers.

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Buyers can encounter considerable difficulty when trying to

assess value. Their judgements are biased and emotional.

In addition, customers are usually looking at a combination of

factors when judging value, some of that may be different

from the factors considered important by managers.

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Understand the Price Mind set

• Everyone is doing it!

• The market is shrinking and there are a lot of competitors using low price as their marketing

tool.

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Creating Customer Value

Many successful organisations have come to a fundamental

realisation:

The job of any market-driven organisation is not to sell a

product, but instead to create value for customers.

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Firms create value in many ways. In fact, the possibilities are

virtually limitless. Improved quality, faster service, more

comprehensive warranties, unique features and options, better

delivery, easier ordering, and a convenient location are but a

few examples of sources of customer value. Value is created,

then, through product benefits.

Customers do not purchase a product per se. What they are

actually buying is a set of need-satisfying benefits.

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The primary aim must be to offer products formed in

consonance with consumer demand, at prices compatible with

consumer evaluations and corporate sales/profit objectives.

Consumers value many other things apart from price.

Competition never occurs only in terms of price.

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Customers frequently do not purchase the item with the

highest quality, but they do tend to consider only those

products that meet minimal quality standards.

Further, some observers assume that quality is directly

associated with price. That is, higher price serves as an

indicator of higher quality.

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Where buyers are confused about the

attributes and performance capabilities of an

item, they will tend to use price as an indicator

of quality.

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Adding Value

• Customer service as the potential success. Reward major customers for their loyalty

• Try not to buy loyalty – earn it.

• maybe movie tickets?

• Maybe thank you letters to some smaller customers sometimes to make feel

appreciated? MAANZ International

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END

MAANZ International