Discount and Allowance Pricing
These involve special adjustments on the basic price to reward customers for certain responses, such early payment of bills, volume purchases, and off-season buying. These may include:
1. Discounts : consist of reductions from the list price as a reward for bulk /volume buying, early bills payment or distribution services. Discounts are normally offered as part of pricing strategies. They include:
a) Quantity discount: is a price reduction offered to buyers who buy large volumes. Bulk discounts are used if a single order exceeds a certain volume or value level or may be used on a cumulative basis .They are used to encourage larger quantity purchases and cumulative discounts encourage loyalty over time..
b) Cash discount: a price reduction to buyers who pay their bills promptly. A typical example is "2/10, net 30," which means that although payment is due within 30 days, the buyer can deduct 2 percent if the bill is paid within . They are also used in consumer markets to reflect the mode of payment e.g. cash or cheque or credit card or installments etc that may involve some additional processing fees. Cash discounts increase the seller’s liquidity, reduce collection costs and bad debts
c) Functional discount/ trade discount: is based on the services the buyer or channel members are expected to perform in future in reselling such as storage and record keeping. The value of the discount will depend on the type of service performed and the location of the buyer in the distribution channel. Different markets also have their own traditional discount structures.
d) Seasonal discount is a price reduction offered to buyers who buy products out of season. They are used to offset cash flow problems of utilizing capacity in slow periods and thus allowing the seller to keep production steady during an entire year. Examples : used by airlines, hotels, tourist attractions, entertainment parks etc
2) Allowances: are reductions from the list price offered to buyers for performing additional services. They include:
a) Trade-in allowances are price reductions given for turning in an old item when buying a new one i.e. involve exchange of a good as well as money for whatever is being purchased . Trade-in allowances are most common in the automobile industry but are also given for other durable goods. The main problem is in determining the value of the item being traded in.
b) Promotional allowances: are payments or price reductions to reward dealers for participating in joint advertising and sales support programs with the manufacturers.
2. Segmented Pricing
Involves adjusting basic prices by setting two or more to allow for differences in customers, products, and locations but not based on differences in costs. Thus it may take any of the following forms:
a) Customer-segment pricing: where different customers pay different prices for the same product or service. Museums, for example, may charge a lower admission for students and senior citizens. Movie theaters charge different rates for children and adults
b) Product-form pricing : where different versions of the product are priced differently but not according to differences in their costs.
c) Location pricing: charging different prices for different locations, even though the cost of offering each location is the same. For instance, theaters/stadiums vary their seat prices because of audience preferences for certain locations, and state universities charge higher tuition for out-of-state or foreign students.
d) Time pricing: varying prices by the season, the month, the day, and even the hour. Some public utilities vary their prices to commercial users by time of day and weekend versus weekday. Resorts give weekend and seasonal discounts. E.g. Airlines , public vehicles transport, movie theater and tourist resorts
3. Psychological Pricing
Pricing products by focusing on the psychology of prices and not simply the economics. For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality. But when they cannot judge qual¬ity because they lack the information or skill, price becomes an important quality signal
Another aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation.
4. Promotional pricing Temporarily pricing products below the list price, and sometimes even below cost to create buying excitement and urgency in order to increase short-run sales. Promotional takes several forms.
a) Loss leader pricing: Supermarkets and department stores will price a few products as loss leaders to attract customers to the store in the hope that they will buy other items at normal prices .
b) Special-event pricing in certain seasons to draw more customers. E.g. Christ-mass, Easter holiday, back-to-school etc
c) Cash rebates: Use of price refunds encourage consumers to buy the products within a specified time. It is common in automobile and durable goods markets even though they are also used with consumer packaged goods.
d) Other promotional pricing techniques include: low interest financing, longer warranties, or free maintenance to reduce the consumer's price. This practice has become a favorite of the auto industry.
e) Price discounts : price reductions from normal prices to increase sales and reduce inventories.
Promotional pricing may have negative effects such as :
a) Price promotions can create "deal-prone" customers who wait until brands are on sale before buying them. i.e. addicting to customers to customers
b) Constantly reduced prices can erode a brand's value in the eyes of customers.
c) Marketers sometimes use price promotions as a quick fix instead sweating through the difficult process of developing effective longer-term strategies for their brands.
d) The frequent use of promotional pricing can also lead to industry price wars. Such wars usually play into the hands of only one or a few competitors—those with the most efficient operations.
5. Geographical Pricing
Relates to pricing decisions made to reflect costs of transport and insurance in getting goods from one place to another. In consumer markets, they can be seen in cases of mail order goods where there is extra charge for postage . In organizational markets , terms of delivery and what is /is not included in the price need to be established in advance as part of the negotiated contract. Thus a company must decide how to price its products for customers located in different parts of the country or world. Forms of geographical pricing include:
o FOB-origin pricing: this means that the goods are placed free on board (FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination. Because each customer picks up its own cost, sup¬porters of FOB pricing feel that this is the fairest way to assess freight charges. One disadvan-tage with this form of pricing is that the product becomes more costly to distant customers.
o Uniform-delivered pricing : A geographical pricing strategy in which the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost. .Uniform-delivered pricing therefore results in a higher charge to near customers who less in transportation costs compared to distant ones. Other advantages of uniform-delivered pricing are that it is fairly easy to administer and it lets the firm advertise its price nationally.
o Zone pricing: A geographical pricing strategy in which the company sets up two or more zones and all customers within a given zone pay a single total price; the more distant the zone, the higher the price. In this way, the customers within a given price zone receive no price advantage from the company.
o Basing-point pricing: the seller selects/designates a given point/city/town as a "basing point" and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. This means that if all sellers used the same basing-point city, delivered prices would be the same for all customers and price competition would be eliminated. Some companies set up multiple basing points to create more flexibility: They quote freight charges from the basing-point city nearest to the customer.
o Freight-absorption pricing : A geographical pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business. The seller might reason that if it can get more business, its average costs will fall and more than compensate for its extra cost. Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets.
Lellah answered the question on November 8, 2021 at 05:05