Dynamic Targeted Pricing in B2B Settings

54 Pages Posted: 30 Aug 2011 Last revised: 7 Nov 2016

Jonathan Z. Zhang

University of Washington - Michael G. Foster School of Business

Oded Netzer

Columbia Business School - Marketing

Asim Ansari

Columbia Business School - Marketing

Date Written: 2014

Abstract

We model the multifaceted impact of pricing decisions in B2B contexts and show how a seller can develop optimal inter-temporal targeted pricing strategies to maximize long-term customer value. We empirically model the B2B customer’s purchase decisions in an integrated fashion. In order to facilitate targeting and to capture the short and long-term dynamics of B2B customer purchasing, our modeling framework weaves together in a hierarchical Bayesian manner, multivariate copulas, a non-homogeneous hidden Markov model, and control functions for price endogeneity. We estimate our model on longitudinal transactions data from an aluminum retailer. We find that customers in our dataset can be best represented by two latent states - a “vigilant” state characterized by heightened price sensitivity and a cautious approach to ordering, and a more “relaxed” state. The seller’s pricing decisions can transition customers between these two states. An optimal dynamic and targeted pricing strategy based on our model suggests a 52% improvement in profitability compared to the status quo. Furthermore, a counterfactual analysis which examines the optimal policy under fluctuating commodity prices reveals that the seller should pass much of the costs to customers when commodity prices increase, but hoard most of the profit when commodity prices (seller’s costs) decrease.

Suggested Citation

Zhang, Jonathan Z. and Netzer, Oded and Ansari, Asim, Dynamic Targeted Pricing in B2B Settings (2014). Zhang, Jonathan Z., Oded Netzer, and Asim Ansari. "Dynamic targeted pricing in B2B relationships." Marketing Science 33.3 (2014): 317-337. Available at SSRN: https://ssrn.com/abstract=1919153 or http://dx.doi.org/10.2139/ssrn.1919153

Jonathan Z. Zhang

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Oded Netzer (Contact Author)

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Asim Ansari

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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