This document discusses pricing strategies when entering new business-to-business (B2B) markets. It covers challenges of B2B markets like long sales cycles and complex offerings. It also examines market entry barriers in B2B like firm-specific advantages held by incumbents. The paper then analyzes market entry strategies and modes, as well as differences between B2B and consumer pricing. Finally, it provides a framework for implementing pricing strategies in new B2B markets by considering factors like value creation, profitability of entry modes, and pricing behavior.

1. TAMPERE UNIVERSITY OF TECHNOLOGY
Tampere School of Business and Technology
ONUR TAMUR
PRICING WHEN ENTERING A NEW MARKET IN B2B ENVIROMENT:
Understanding the B2B Dynamics
Seminar Report

2. ii
ABSTRACT
With the rise of globalization and saturated local markets, many companies started
chasing international opportunities that would help them expand to new countries
and increase their brand recognition around the globe. One of the challenges that
companies face while entering a new market is defining the right price and pricing
of their offering to be competitive and successful in the market. In B2B area, there
are not any wide research on pricing issues that companies face in the markets that
they are planning to enter and the effects of business relations on pricing.
This paper focuses on market entry strategies and market entry modes, the
fundamentals of pricing in a new market and the differences of B2B and B2C
pricing. The study covers market entry modes and its impact on profitability, value
creation in B2B area and the key aspects of pricing behaviour while entering a new
market.
This study in general provides a framework for implementing the right pricing
strategy while entering new markets and defining the right pricing behaviour in
B2B environment. This framework enables companies to understand the dynamics
of B2B environment covering buyer-supplier and distributors relations and
providing pricing models for companies to be a competitive player.
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3. iii
PREFACE
This paper discusses the concepts of pricing and pricing behaviour in a new market
in B2B environment. The paper attempts to highlight the key aspects of supplier-
manufacturer relations, value creation models and pricing framework to be
competitive in the new market.
It has been a very interesting topic for me because of my special interest in B2B
markets and pricing issues in the business environment. I am very thankful to my
supervisor Dr. Jouni Lyly-Yrjänäinen who helped me to pick the right topic for
analysis and supported me through the process. I am thankful to my seminar group
members who helped me with their inputs during discussions. Also, I am very
thankful to Ali Kutlay and Mert Murat Mertadam for their support and feedback
through the preparation of the paper.
Onur Tamur
Tampere, January 2011
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4. iv
TABLE OF CONTENTS
ABSTRACT ______________________________________________________ ii
PREFACE _______________________________________________________ iii
1 INTRODUCTION ____________________________________________ 1
1.1 Background __________________________________________________ 1
1.2 Objective of the Paper __________________________________________ 1
2 ENTERING NEW MARKETS IN B2B ___________________________ 3
2.1 The Challenges of B2B Markets __________________________________ 3
2.2 Market Entry Barriers in B2B ___________________________________ 4
2.3 Market Entry Strategies ________________________________________ 5
2.4 Market Entry Modes ___________________________________________ 6
3 PRICING IN B2B _____________________________________________ 8
3.1 Differences of B2B and B2C Pricing ______________________________ 8
3.2 Pricing Techniques ____________________________________________ 9
3.3 Pricing Framework in a New Market ____________________________ 10
4 PRICING IN A NEW MARKET IN B2B ENVIRONMENT ________ 12
4.1 Market Entry Modes in Terms of Profitability _____________________ 12
4.2 Value Creation in B2B _________________________________________ 13
4.3 Pricing Behaviour in a New Market______________________________ 14
5 CONCLUSION ______________________________________________ 18
REFERENCES __________________________________________________ 19
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5. 1
1 INTRODUCTION
1.1 BACKGROUND
According to Lee and Carter (2005), globalization is an inevitable and irreversible
process fundamental to the future of world economic development. The growing
integration of national economies around the world will lead to rapid economic
growth and poverty reduction in developed and developing countries. However,
there are also some arguments supporting that globalization exacerbates poverty
and inequality between rich and poor, cultural convergence and spread of deadly
diseases (Lee and Carter 2005).
Even though there are many debates on globalization, it is accepted as an industrial
reality and an increasing trend in current business environment. As the developing
technology is reducing the transportation costs, the interests of organizations
working in international markets will keep on spreading around the globe. This
presents organizations with unlimited opportunities to grow and transform to
become not only larger but also more competitive and efficient (Lee and Carter
2005). On the other hand, it covers some risks as well. Companies need to follow
the right strategies in terms of market entry and pricing to be able to compete with
other international companies and local competitors in the market and to keep on
widening their business operations around the world.
1.2 OBJECTIVE OF THE PAPER
As it is explained in the background section, globalization is an increasing trend in
business and organizations need to follow this trend by using the right strategies
and taking the right decisions to be able to have competitive advantage against their
competitors. The objective of the paper is to...
...analyze the possible market entry and pricing strategies in business-to-
business environments and how the organizations should position their
pricing behaviour and value creation model.
The paper will consist of five major parts. First, the background information about
globalization issues with a short explanation about opportunities and challenges
will be stated and the objective of the paper will be defined. Second, the challenges
of B2B markets, market entry barriers in B2B environment, different market entry
strategies and different types of market entry modes will be examined. Then, the
differences between B2C and B2B pricing, different pricing techniques and pricing
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6. 2
framework in a new market will be highlighted. Next, market entry modes in a
profitability point of view, value creation in B2B environment and pricing
behaviour in the new market will be deliberated. Finally, key results and the
conclusion will be stated.
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7. 3
2 ENTERING NEW MARKETS IN B2B
2.1 THE CHALLENGES OF B2B MARKETS
The intention to make profit is the most important characteristic when buying
products in B2B markets (Lyly-Yrjänäinen et al. 2010). Thus, purchasing process is
much formal and takes longer time because of long price negotiations. Many
companies tend to build long-term relationship to be able to derive their demand
when needed. This long term relationship results in close personal relationships
which are difficult for competitors to break (Lyly-Yrjänäinen et al. 2010).
According to Calhoun et al. (2007), segmentation is far more challenging in B2B
than in consumer markets. Sales cycles are long, and offerings are complex.
Moreover, many customers care less about initial product costs and more about the
total costs of ownership, including service, maintenance, upgrades, and other
factors. Competitors‟ offerings and strategies shift so quickly that managers cannot
reliably compare the impact of changes in a given marketing lever over more than
one quarter of business. In addition, customer relationship management systems
cannot easily capture the decisions and actions that led to success or failure with
any particular account, because such information is largely anecdotal, not
quantitative (Calhoun et al. 2007).
Matthyssens et al. (2008) has examined the challenges in B2B marketing in terms
of globalization. First challenge is delocalization of the customers. As
multinational companies are moving their production and assembly units to low-
labour cost countries, industrial suppliers and subcontractors see their home market
shrinking. Second, purchasing function is globalizing as the purchasers from
multinational companies seek global purchasing synergies (Quintens et al. 2006).
Next, the importance of global networks is increasing (Harris and Wheeler 2005).
Last, the fourth challenge faced by B2B companies is the transition to electronic
forms of exchange. E-Internationalization is still challenging for companies
because they may lose their intellectual property on the web and B2B relationships
are more difficult to manage in the electronic highway (Samiee 2008).
Despite the above-mentioned challenges, more and more B2B companies expand
their operations internationally since international activities are fundamental to
their performance (Katsiekas 2006).
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8. 4
2.2 MARKET ENTRY BARRIERS IN B2B
The entry barriers refer to industry characteristics which result in requirements that
companies must meet in order to enter a certain sector (Lyly-Yrjänäinen et al.
2010). Karakaya (2002) states that limited competition which is caused by market
entry barriers for new firms often increase the profits of incumbent firms in the
marketplace. Thus, barriers to entry sometimes lead to monopoly conditions
(Karakaya 2002). According to Karakaya (2002), barriers to entry in industrial
markets are different than barriers to entry in consumer markets and they need to be
distinguished. He offers four major dimensions of entry barriers in industrial
markets which are summarized in Table 1.
Table 1. Market entry barriers in B2B environment (Karakaya 2002)
Firm specific advantages Product differentiation
 Proprietary product technology  The brand identification advantage held
 Possessing strategic raw materials by incumbents
 Trade secrets held by incumbent firms  Customer loyalty
 Absolute cost advantages  Heavy advertising by firms already in
 Superior production processes the market
 The expense of marketing a product
 Customers' costs in switching from one
supplier to another
 Access to distribution channels
Financial requirements Profit expectations of the entering firms
 The capital requirements to enter  The magnitude of the market share held
markets by incumbents
 The capital intensity of the market  The expected reaction of the
 The amount of sunk cost involved in incumbents to the arrival of a new
entering a market player in the market
 The research and development expense  The number of firms in the market
involved in market entry  The high profit rates earned by
incumbents
 The low prices charged by incumbents
Some of the costs of entry are sunk costs and become barriers to exit once entered
the market (Karakaya 2002). Thus, the companies need to estimate the amount and
types of costs exhaustively before making an entry decision.
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9. 5
2.3 MARKET ENTRY STRATEGIES
Internationalization and its impact on market entry is a strategic decision in
globalization (Liu and Cheng 2000). Thus, market entry strategy is considered as
an important success factor while entering new markets. It is important to
understand the customer preferences, business and management culture and
regulations in foreign countries to be competitive and it is hard to find competent
managers with the required skills in the international area (Lyly-Yrjänäinen 2010).
The international market entry strategies can be analyzed with seven different
theories:
 Uppsala Model: Firms develop their activities abroad incrementally by
developing their knowledge. This knowledge is called experiential
knowledge and gained through personal experiences (Johanson and Vahlne
1977).
 Eclectic Paradigm: Eclectic paradigm is based on the ownership-specific
advantages. Market entry decisions are made in a rational manner by
considering the costs of the transaction ( Dunning 1988).
 Industrial Networks: This method supports that the international market
entry decisions shouldn‟t be based on the entering firm only. As the whole
industrial network that the firm is working with is affected by this decision,
it should be analyzed with a more general view by considering the other
firms in the industrial network.
 Business Strategy: Business strategy method is based on market
opportunities, firm resources and managerial philosophy. Unlike the other
theories, business strategy is more focused on market opportunities than
firm-based issues (Reid 1983).
 The Agency Approach: The agency approach to entry mode selection is
based on the principle of a contract where one party delegates to another.
Franchises, licensing, joint venture and alliances are examples (Carney and
Gedajlovic 1991).
 The Bargaining Power Approach: The bargaining power approach sees
the choice of entry mode as the outcome of negotiations between the firm
and the government of the host country (Gomes-Casseres 1990).
 The Transactional Cost Analysis Theory: Transactional cost analysis
theory (TCA) is based on the theory that a firm will internationalize if it can
perform at a lower transaction cost than if it exported or entered into a
contractual arrangement with a local partner (Kumar and Subramanian
1997).
These theories indicate diversity in internationalization process for a firm and
provide different emphases on the issue of international market entry (Whitelock
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10. 6
2002). Thus, it is important to pick the right entry strategy by examining the
position and opportunities of the firm in the new market.
2.4 MARKET ENTRY MODES
According to Johnson and Tellis (2008), the mode of entry is a fundamental
decision a firm makes when it enters a new market because the choice of entry
automatically constrains the firm‟s development strategy in the market. They listed
market entry modes in five main groups which are illustrated in Figure 1.
Figure 1. Market entry modes
Four market entry modes that do not cover off-shoring are explained in details
below:
 Exporting: a firm‟s sales of goods/services produced in the home market
and sold in the host country through an entity in the host country.
 Agent: agents look for business opportunities abroad and take care of the
negotiations between sellers and buyers.
 Dealer: dealer is a distribution channel in a host country that purchases the
products from the manufacturers and sells them to retailers.
 Sales office: sales offices are owned by manufacturers and they take care of
sales in the host country.
In addition to the entry mode and strategy, the role of market entry timing is critical
as well in a new market entry decision (Pan and Chi 1999). The method used for
timing market entry mostly depends on depends on the type of product, the
particular market, the amount of competition and the budget available. The method
used may also involve a single strategy or a hybrid of different strategies.
A first mover can benefit from risk-free consumers (Schmalensee 1982), be
recognized as the industry standard (Carpenter and Nakamoto 1989), and preempt
competition with broader product lines (Prescott and Visscher 1977). However,
Golder and Tellis (1993) state that pioneers are not the long-term winners in a
market. It is suggested that this strategy works best in industries where product life
is short, such as the high-tech industry.
Entering a market late can have certain advantages as well, particularly if the
pioneers have grown complacent or can no longer cater to a growing market, and
also, if the late arrival has an innovative way to market their product. Markets that
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11. 7
are already cluttered with products offer some opportunity for a late arrival that is
of better quality or uses new delivery channels.
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12. 8
3 PRICING IN B2B
3.1 DIFFERENCES OF B2B AND B2C PRICING
Although pricing in B2B and retail markets have similar goals, they have different
kind of challenges (Valuckaite and Snieska 2007). In B2B environment, companies
make purchasing decisions to make profit so this makes the purchasing decisions
more risky. Thus, companies tend to form long-term relationships and agree on a
fixed-price with their suppliers.
According to Valuckaite and Snieska (2007), even though retail companies have a
high transaction volume, they have a relatively simple pricing calculation. In B2B
markets, customer is a firm and organizational purchasing is considered more
complex than consumer purchasing (Valuckaite and Snieska 2007). Thus, B2B
environment requires a combination of strategy, business process and technology
so that firms can capitalize ahead of their competitors and gain tremendous
competitive advantage.
Pricing decision in B2B markets has to involve currency considerations, market
share dynamics, financial factors and the need that the price has to be
predetermined by the quality and price balance which are explained in details in
Table 2.
Table 2. Differences of B2B and B2C pricing (Valuckaite and Snieska 2007)
Factor B2C B2B
Transaction Volume High Low to High
Pricing Data Accurate info Many resides in many
systems
Pricing Calculation Simple Complex
Pricing Authority Centralized Distributed especially if
sales team determines
discounts
Pricing Levels Few Many reside in many
systems
Pace of Change Low Medium to High
As described on the table above, B2B and B2C pricing differ from each other in
many aspects. In B2C, transaction volumes are high which in B2B is very volatile
and may change from low to high. Pricing data has accurate info in B2C which in
B2B resides in many different systems. Pricing calculation can be considered as
simple in B2C environment but in B2B it is considered as a complex process. In
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13. 9
addition pricing authority is also centralized in B2C. However, In B2B it is
distributed as the sales team determines discounts in many cases. In addition to
pricing data, pricing levels reside in many systems in B2B as well which has very
few levels in B2C environment. Last but not least, pace of change is very low in
B2C but in B2B pace of change fluctuates from medium to high.
3.2 PRICING TECHNIQUES
Pricing has a huge impact on profitability (Hinterhuber 2008). Thus, pricing
strategies should be evaluated methodically before setting the price of a product.
Pricing is affected by different strategies that companies choose to operate in a
given market (Lyly-Yrjänäinen 2010). There are four pricing techniques that are
commonly used in different industries that are explained in Table 3 in details.
Table 3. Commonly used pricing techniques (Lyly-Yrjänäinen 2010)
It uses the value that a product or service delivers to a
segment of customers as the main factor for setting prices
Value-based pricing (Hinterhuber 2008). Value-based pricing is increasingly
recognised in the literature as superior to all other pricing
strategies (Ingenbleek et al. 2003).
It uses anticipated or observed price levels of competitors
as primary source for setting prices (Hinterhuber 2008).
Market-based pricing
The main weakness of market-based pricing is that it
doesn‟t take customers willingness to pay into account.
It is based on the data from cost accounting (Hinterhuber
Cost-plus pricing 2008). It leads to lower-than-average profitability in
many cases (Simon et al. 2003).
It is more used in investment goods where companies ask
Negotiation pricing for bid from several potential suppliers (Lyly-Yrjänäinen
2010).
According to Holden and Burton (2008), there are three basic pricing models in a
new market:
 Skim pricing
 Neutral pricing
 Penetration pricing
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14. 10
First, skim pricing means that prices are set high relative to mainstream competitors
to maximize revenues generated from the high end of the market (Holden and
Burton 2008). It is mostly used to maximize revenues and product differentiation is
an important success driver in this method. Stubbornly sticking to skim pricing
creates market opportunities for new competitors (Holden and Burton 2008).
Second, neutral pricing can be identified as prices are set close to those of your
main competitors (Holden and Burton 2008). Companies use this method to reduce
the impact of price competition against a market leader. A neutral pricing strategy
is also the best choice when markets are growing slowly or not at all (Holden and
Burton 2008). Third, penetration pricing can be stated as prices are set quite low
relative to the competition to make price a driving factor in the purchase decision
(Holden and Burton 2008). It is mainly used to capture reasonable market share and
to increase product recognition in the eyes of potential customers. The main
problem in penetration pricing is that price cuts are easy for competitors to match
as well in many cases so when they do, no competitor sees an increase in either
sales or share (Holden and Burton 2008).
3.3 PRICING FRAMEWORK IN A NEW MARKET
According Brennan et al. (2007), although cost-plus pricing is often used in B2B
markets it has the serious drawback that it ignores both customer price sensitivity
and potential competitor action. Most B2B markets are oligopolies so that there is
an ever-present risk of a price-war if any of the competitors engage in aggressive
price-cutting. Firms should be encouraged to think of pricing as a continuous
process rather than a once-off decision (Brennan et al. 2007).
Even though value-based pricing has some obstacles in value assessment and
communication in the implementation period, it is known as the most efficient way
of pricing in the current business environment and has an increasing trend in the
market (Hinterhuber 2007). Companies want to assess the value they offer to their
customers with their products so that they can keep on developing and customizing
their offer to the customer needs. However, in a new market entry companies need
to take competitive dynamics in the new market into consideration and price their
product accordingly. Thus, the pricing in a new market should be capable of
considering the value created to its users and be sensitive to the competition level
in the market. The framework for pricing in a new market is illustrated in Figure 2.
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15. 11
Figure 2. Pricing framework in a new market
The basic understanding of competitors and the level of competition form a great
advantage for a new entrant in a market to deduce the right pricing model which
are mentioned above. As the first intention is to make profit in B2B environment,
companies need to create value both for their organizations and their customers.
Thus, it is very important to analyze the market thoroughly before the entry
decision and evaluate if they want to skim, stay neutral or penetrate the market. If
these methods are used efficiently, it is highly possible that the entrant can be a
strong player in the market and capture a satisfactory market share.
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4 PRICING IN A NEW MARKET IN B2B ENVIRONMENT
4.1 MARKET ENTRY MODES IN TERMS OF PROFITABILITY
There are five different market entry modes that are exporting, licensing, alliance,
joint venture and wholly owned subsidiary which are explained in details in
Chapter 2.4. Each way is different in terms of commitment, risk, control and profit
potential. As the involvement and degree of control increase, the profitability
potential also increases. Johnson and Tellis (2008) state that the higher the resource
commitment and desired control of an entry mode, the higher is the cost which
requires higher levels of investments (Johnson and Tellis 2008).
Figure 3. Analysis of different market entry modes in terms of risk and profit potential.
International diversification through foreign market entry can result in high growth
and profitability unavailable in home markets (Root 1994). However, matching
strategy and the appropriate form of entry mode is a big challenge for companies
(Lee and Carter 2005). It is highly possible that a company needs to combine
multiple techniques to enter a host country and be successful.
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17. 13
4.2 VALUE CREATION IN B2B
Even though one of the characteristics in B2B markets is that the use of direct sales
channels, many industrial companies use different types of intermediaries as well
which are agents and distributors (Lyly-Yrjänäinen 2010). For large customers,
mostly direct sale method is being used. If the volumes are not that high,
manufacturers use a distributor who stores their products and delivers them to the
end customers whenever they need and with the use of market intermediaries, the
number of customer relationships that the manufacturers need to manage can be
reduced dramatically (Lyly-Yrjänäinen 2010).
Figure 4. Basic idea of contribution margin when selling to different customers.
According to Lyly-Yrjänäinen (2010), distributors take care of various activities
that reduce the costs of the manufacturer and therefore no longer need to be
covered by contribution margin. The activities covered by distributors can be listed
in four main points:
 Providing a sales force to sell the goods to other buyers
 Communicating the manufacturers‟ marketing message to the customers and
providing market information to the manufacturer
 Maintaining inventory, thus reducing the level of the inventories
manufacturers need to carry
 Arranging the transportation to the customers
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18. 14
Figure 5. The effect of sales volume on the end-customer price and distributor’s price
The discounts are also usually related to the volume of each distributor and larger
volumes provide larger discounts (Lyly-Yrjänäinen 2010). Thus, the sizes of the
distributors and sales volume have a huge impact on the final price of the product
in B2B environment.
4.3 PRICING BEHAVIOUR IN A NEW MARKET
Pricing behaviour in a new market is highly dependent on the market dynamics that
exist in the host country. Thus, it is important to make a deep analysis on the
market by considering the pricing framework which is explained in details in
Chapter 3.3 and its effect on market entry mode that is being used by the
manufacturer. In the figures below, profit margins of different market entry modes
that does not cover off-shoring are compared by using a fixed price for the product
so that the flexibility of the manufacturer in pricing can be highlighted easier. In
Figure 6, pricing structure for exporting explained in details.
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19. 15
Figure 6. Pricing structure while exporting
As illustrated in the figure above, exporting does not provide wide price range for
the product in the new market because of its high contribution costs to the
manufacturer. It is possible to use skim pricing in new market to increase the
possible profit margin if the product being offered is differentiated. It is hard for a
manufacturer to use penetration pricing strategy while exporting a product because
profit margin is very limited. However, exporting is widely used by manufacturers
by entering a new market as it is easier and less risky for the manufacturer to
export their product from the home country. In Figure 7, pricing structure in the
new market by using agents is highlighted.
Figure 7. Pricing structure while using agents
Agents are also widely used by manufacturers as a market entry tool. They operate
in the home country of the manufacturer and help them to find potential customers
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20. 16
for the products available. As they work for the manufacturer, they decrease the
contribution costs of the manufacturer but they take commission from the sales.
Thus, it is still hard for a manufacturer to implement penetration pricing strategy
because of the limited profit margin remaining after considering the costs. In
Figure 8, the pricing structure by using dealers is highlighted.
Figure 8. Pricing structure while using dealers
Dealers are also widely used by manufacturers who want to sell their products in a
new market. They are very efficient because they have a wide knowledge about the
local market and experience about the potential customers for the product offering.
They decrease the contribution costs of the manufacturer by taking over some of
the responsibilities that belong to the manufacturer in exporting so that
manufacturers have the possibility to be more flexible about the pricing of their
product. They can either lower their prices and use penetration strategy or use skim
pricing to keep a high profit margin. In Figure 9, pricing structure by using sales
office is discussed.
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21. 17
Figure 9. Pricing structure while using sales office
Sales offices are the most profitable option for manufacturers to have business
activities in a host country. By using the local experience and knowledge of the
sales team, manufacturers directly decrease the contribution costs of their product
and as manufacturers do not work with another market intermediates anymore in
the host country, manufacturers do not need to pay any fee to them as well. This
provides endless opportunities for the manufacturers in terms of pricing their
product flexibly in the new market thanks to the wide range of profit margin
provided by the low costs compared to the previous market entry modes in terms of
using skim, neutral and penetration pricing strategies without a doubt. However,
having a sales office in a host country requires a big initial investment from the
manufacturers which might be hard to be followed by small or mediocre firms.
Thus, it is important to have high sales volume in the host company to be able to
benefit from the sales office efficiently.
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22. 18
5 CONCLUSION
Globalization trend has enabled new business opportunities for all companies
around the world. Many companies pursue new markets around the globe where
they can expand their brand recognition and sales volumes. However, In B2B
environment there has not been a wide research on pricing which can orientate
organizations to take their pricing decisions in the market.
The objective of this paper was to highlight the importance of market entry
strategies and their effect on pricing decision in the new market by considering the
market entry mode used. B2B environment has many different aspects compared to
B2C and these issues should be examined carefully before becoming a global
player and making an entry decision into a new market.
Based on this research, this paper examines the challenges and different aspects of
B2B environment, possible market entry strategies and market entry modes while
entering a new market and pricing techniques that can be implied in the new
market. Unlike B2C, B2B markets have many aspects to be taken into
consideration while making a market entry decision by considering the market
entry mode used in the entry. Also, market intermediates take an important role in
pricing in B2B environment because they take care of various activities and reduce
the costs of manufacturers which lead to special discounts to intermediates
depending on the size and sales volumes to the end customers.
Finally this paper supports that the pricing decision in a new market should be
taken by considering the competitors and competition in the market. It suggests
three models which are skim pricing, neutral pricing and penetration pricing and
they should be used according to the market conditions in the market and market
entry mode that is applicable in the environment.
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23. 19
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