Taking a customer‐centric view of discounting

Abstract

Purpose

The aim of this paper is to describe a better decision framework for setting prices of goods and services, with particular focus on B2B goods sold through direct sales channels (although this may be applicable to many B2C markets also.) The focus is to link situations to pricing strategies, and so anchor pricing to factors that actually drive buyer decisions.

Design/methodology/approach

A large number of interviewees (850) in a number of industries (about 20), in a range of senior and buying‐related capacities, were asked how they evaluated potential purchases. In particular, what role pricing played, and how decision‐makers evaluated the prices offered by incumbent and new vendors. Interviews are supplemented through a number of case studies and references.

Findings

A key finding is that buying decisions are based on only three potential points of reference. The point of reference can be inferred by sellers with confidence from cues and understanding of the organizational history of the buying organization. With an understanding of which point of reference applies, sellers can correctly determine the required offer price. An additional finding is that in situations where the reference or competitive product comparison is unfavorable, there are ways in which sellers can point of reference by “changing the level of play” and so potentially change the outcome in their favor.

Research limitations/implications

The findings are based on a limited number of interviews (850) and a limited number of industries (about 20). There may be instances where price level is a greater driver of customer behavior than suggested here.

Practical implications

The paper suggests that in many instances companies are mistaken in their approach to pricing. They neglect to consider buyer frames of reference, and so discount unnecessarily. The framework in this article also provides senior sales and marketing management with a process by which they can manage discounting.

Social implications

This article helps “penetrate the black box” of buyer decision making, and links it to the objectives, experience and situations at the buyer's institution.

Originality/value

This paper is the first systematic view of buyer points of reference for pricing. Builds upon original interviews to show that the pricing reference point shifts to a limited number of comparison points, and even with limited information, sellers can make good judgments of what is the benchmark used by buyers – they do not need to guess.

Citation

Docters, R., Riley, L.C. and Gieskes, M. (2013), "Taking a customer‐centric view of discounting", Journal of Business Strategy, Vol. 34 No. 1, pp. 15-20. https://doi.org/10.1108/02756661311301747