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Price setting in B2B-scenarios

Applicability of established behavioural pricing schemes in a rational decision making environment

Written by Anonymous

Grade 1.0

Paper category

Term Paper

Subject

Business Administration>Marketing & Sales

Year

2019

Abstract

Price models are constantly developed and can have a significant influence on a company’s success. The entrance of new successful players in the market often contain a price model innovation. Netflix for instance changed the traditional daily rate model for films at video stores to a flat rate, time-independent membership model. Ryanairas another example unbundled the different air travel elements for passengers, like seat selection, baggage and on-board catering in order to outperform their competition (Nagle et al., 2016, p. 1).Especiallynew,low-cost playersin the market threaten the existing companies and their supplier networks. Therefore, buying teams choose their suppliers based on several criteria wherein pricing is playing an important role(Gale & Swire, 2012, pp. 41-42).Moreover, transactions in B2B markets are more complex than in typical Business-to-Customer (B2C) markets, which also concerns the price setting. The interrelated decision-makingof business customers requiresa sophisticated approach for abehaviouralpricingscheme,suiting the different aspectsand needsof interorganisational buying behaviourand the affected employees (Zhang, Z., 2011, pp. 1-2). Resulting from theseissues, the underlying research questionfor this academic term paper isstated in the following:the following: What are current B2C behavioural pricing schemes and are they applicableto B2B-companies? In order to provide a common understanding of the topicand a basis for the further research, the terms “pricing”, “price setting” and “B2B companies” are defined and shortly explained.Pricing differs from the other elements of the marketing mix. Whereas product, distribution and promotion all contribute to the value creation for the customer, pricing is a method of capturing the created value in form of financial benefits (Schindler, 2012, pp. 5-6). According to the marketing specialist Homburg, “pricing”includes all decisions concerning the price or fee that is paid by the customer for a certain product or service(2006, p. 667).The prices achieved in the market determine the profit of a company. This can be illustrated by the formula: revenues (price x sales volume) –cost = profit. As trivial as it looks on the formula, as difficult it is to analyse the influences of pricing andto set the right prices for a product in practice (Esch et al., 2011, p. 305).Pricing for new products or innovations on the market are especially complex, due to a lack of knowledge concerning the influences and market reactions to prices (Kotler et al., 2007, p. 589.)The procedure of “price setting” consists of mainly quantitative methods, but also qualitative aspects influence the process. Most of the approaches to price setting are based on the common philosophical belief that the price is a representation of value (Smith, 2012, pp. 2-3). The price setting process is influenced by three major factors: cost, demand and competition (Hoque, 2005, pp. 123-125).According to this, Homburg distinguishes between three general price setting approaches: demand-driven, cost-oriented or competitive price setting(2006, p. 720).“B2B companies” are companies that act on a B2B market. A B2B market is a market, where on the supplier-as well as on the demand-side only organizations act (Fuchs,2003, p.3).B2Bmarkets are also characterized by the fact that organizations can acquire products either for their own usage, for further processing or resale. Organizations can consist of privately-owned enterprises or public institutions, but of no private end-consumer on the market. This is one of theclear distinction to B2C markets, which are analyzed profoundly in the following(Andersen et al., 2009, p.4). This paper is concluded by shortly summarizing the answer of the underlying research question “What are current B2C behavioural pricing schemes and are they applicable to B2B-companies?Behavioural pricing is a topic, where a lot of research effort was invested during the last decades and even centuries. It is strongly connected to psychology, and therefore was always in the mind of sophisticated researchers. Throughout the last decades, many different B2C behavioural pricing schemes havebeendeveloped based on this almost 200 years old research. However, five out of the most significant theories are the Prospect Theory, the Mental Accounting theory, the Weber-Fechner Law, the Adaptation-Level Theory andthe Assimilation-Contrast Theory. The behavioural pricing theories differ slightly concerning their practical application abilityin a B2B scenario, as well as in the application possibilities.First of all, it can be stated that each of the five theories can be somehow applied to B2B settings.Almost every of the five theories can be applied within price negotiations between buying and selling teams. Moreover, the Weber-Fechner Law is particularly important when it comes to price reductions and its perception. Furthermore, the Assimilation-Contrast Theory is a crucial approach for CRM and price adaptions in B2B companies. In addition to that, the Adaptation-Level Theory is not only considered within marketing departments, but can also play a role in accounting during budget allocation within business planning and in HR during salary negotiations. In order to provide an outlook for future developments, it can be stated that behavioural pricing in B2C, as well in B2B scenarios, experiences a constant changeand different strategies or theories occur throughout the years.Commerce experiences kind of a revolution due to the drastic increase of online commerce and the fading boundaries between B2B and B2C commerce. Therefore, omni-channel pricing strategies, subscription economy and dynamic pricing with the help of machine learning and artificial intelligence become more and more the focus of marketing and pricing departments in the future (Smith, 2017).Behavioural pricing research is also shifting towards new dimension in the future. A new concept called “Neuropricing” will shape the future concerning the research for the customer’s willingness to pay for products. As well as in consumer behaviour research, fMRIand EEG brain scans provide information about customer’s reactions and perceptions towards different prices for products. In a testing scenario, the customers are confronted with real purchase decisions in order to provide the best results for the research (Müller, 2013). However, companies have to consider in the future if the expensive instruments for research areworth the money. But as Warren Buffet already stated in the beginning, due to the vast importance of pricing for companies, the investment seems worthwhile. Read Less