Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic

Marketing: A

Global−Managerial

Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

540 Chapter 18

plus an agreed-on profit figure (say, 10 percent of costs or a dollar amount)—after

the job is finished.

Some unethical sellers give bid prices based on cost-plus contracts a bad reputa-

tion by faking their records to make costs seem higher than they really are. In other

cases, there may be honest debate about what costs should be allowed. We’ve already

considered, for instance, the difficulties in allocating fixed costs.

Competition must be considered when adding in overhead and profit for a bid

price. Usually, the customer will get several bids and accept the lowest one. So

unthinking addition of typical overhead and profit rates should be avoided. Some

bidders use the same overhead and profit rates on all jobs, regardless of competition,

and then are surprised when they don’t get some jobs.

Because bidding can be expensive, marketing managers may want to be selective

about which jobs to bid on and choose those where they feel they have the great-

est chance of success. Firms can spend thousands, or even millions, of dollars just

developing bids for large business or government customers.^17

Some buying situations, including much government buying, require the use of

bids—and the purchasing agent must take the lowest bid. In other cases, however,

the customer asks for bids and then singles out the company that submits the most

attractivebid, not necessarily the lowest, for further bargaining.

The list price or bidding price the seller would like to charge is sometimes only

the starting pointfor discussions with individual customers. What a customer will

buy—if the customer buys at all—depends on the negotiated price,a price set based

on bargaining between the buyer and seller.

As with simple bid pricing, negotiated pricing is most common in situations where

the marketing mix is adjusted for each customer—so bargaining may involve the

whole marketing mix, not just the price level. For example, a firm that produces

machine tools used by other manufacturers to make their products might use this

approach. Each customer may need custom-designed machines and different types of

installation service. Through the bargaining process, the seller tries to determine

what aspects of the marketing mix are most important to the customer. For one cus-

tomer, selling price may be most important. Then the seller might try to find ways

Ethical issues in cost-
plus bid pricing

Demand must be
considered too

Sometimes bids are
negotiated

Negotiated prices—
what will a specific
customer pay?

The Internet is making it fast and
easy for customers to
communicate their needs to a
larger number of suppliers and to
use competitively based bid
pricing.