Developing A Price Developing A Price StructureStructure

Chapter 16

Price Administration

• Price administration is also concerned with handling price adjustments for sales made under different conditions.

• Price structure decisions define how differential characteristics of the product will be priced and are of strategic importance to the firm and its customers.

Managing Transactions

• Rarely is list price the actual price paid by buyers• Price adjustments are typically made for

– Sales made in different quantities– Sales made to different types of distributors– Sales made to distributors who perform different

functions– Sales made to buyers in different geographical

locations– Sales made with different credit and collection

conditions– Sales made at different times of day, month, season,

or year

Price structure

• Price structure provides the foundation for prices by determining– 1. The time and conditions of payment– 2. The nature of discounts to be provided to

buyers– 3. Where and when title is to be taken by buyers– 4. Who pays for the transportation of the goods

and how these charges are determined

Discounts

• TradeTrade- based on a distributor’s place in the distributive sequence

• FunctionalFunctional- represent payment for performance of certain marketing functions that would otherwise be performed by the manufacturer

Trade or Functional discounts

• Firms typically offer these discounts to independent wholesalers and retailers in order to motivate them to perform needed marketing activities.

• Trade discounts are based on the distributor’s place in the distributive sequence

• Functional discounts represent payment to the wholesalers and retailers for their performance of certain marketing functions that the manufacturer has to perform otherwise.

• Price quoted to distributors as series of numbers such as “30,10,5 OR 2/10 net 30 OR 5/10 net EOM etc.

Promotional discountsPromotional discounts• A promotional discount is an allowance for distributors

efforts to promote the manufacturers product.• Allowance may be in the form of percentage reduction or

additional merchandise– Free cases of Coke for every dozen case ordered– Cash payment of the local newspaper ads

Cash Discounts

• A cash discount is a reward for the payment of an invoice or account within a specific period of time.

• 2/10 net 30

Advance Purchase Discounts

• Lower prices for early purchases• Buyers with lower price sensitivity pay more for the same

service than those who purchase the service ahead of usage.

• Firms that experience seasonal demand for their products encourage buyers to commit to their purchase before they actually need the product.

• Opportunity to use the cash while producing the products instead of borrowing money.

Peak Load Pricing

• Higher prices during periods of higher demand, and lower prices during off-peak periods

• Usually in Electric or Telecommunication sectors– Time of day pricing

QQuantityuantity DiscountsDiscounts

• Most common type of discount

• This discount is granted for Volume purchases (measured in dollars or units)

Example: Applying Discounts:

10 ladders @ $30 $ 300

6 ladders @ $50 300

10 ladders @ $90 900

5 ladders @ $120 600

4 ladders @ $150 600

Total $ 2,700• Trade discounts are 40,10,5• Cash discount 3/10 net 30• Additional Quantity discount of 5% for orders above $1000 or more

Applying Quantity Discount

Total order amount $ 2,700

Discount, $2,700 x 0.05 135

Net order amount $ 2,565

Applying Trade Discounts

Net order amount $ 2,565.00

Less: 40% discount 1,026.00

$ 1,539.00

Less: 10% discount 153.90

$ 1,385.10

Less: 5% discount 69.26

Amount due manufacturer $ 1,315.841,315.84

Applying Cash Discount

Amount due manufacturer $ 1,315.84

Less:3 % discount 39.48

Net Remittance $ 1,276.36

Price Discount StructuresPrice Discount StructuresTypes of Discount Structures

Pricing Decisions

Number of Decisions

Fixed (uniform) price Price 1

All units quantity discount

Price Break points

2 or more 1 or more

Two-part prices Fixed price Variable price

1 1

Two-block prices Fixed prices Variable prices

2 or more 2 or more

Price points Prices 2 or more

Multi-person pricing Prices 2 or more

Fixed (Uniform) Price

Total Revenue

Quantity

TR

Unit Price

Quantity Discount (All Units)

Total Revenue

Quantity

TR

Unit Price

Uniform Two-Part Prices

Total Revenue

Quantity

TR

Unit PriceFixed

Two-Block Prices

Total Revenue

Quantity

TR

Unit Price

2 Two-Part Prices

Total Revenue

Quantity

TR1

TR2

Unit PriceFixed

Price Points

Total Revenue

Quantity

•

•

•

•

•

•

TR

Unit Price

Cash Discounts and Credit Decisions

• The seller must determineThe seller must determineThe amount of the cash discountThe length of the credit periodThe amount to spend on attempting to collect

overdue accountsThe customers to whom to offer credit termsThe magnitude of the line of credit

• Increasing the amount of the cash discount or lengthening the time period that the discount applies will result in increases in demand

Reasons for Cash Discounts

1. To encourage prompt payment of invoices

2. To reduce credit risks and the cost of collecting overdue accounts

3. To follow industry or historical practice

Problems of Cash Discounts1. It may be more economical for a firm to borrow

money on a short-term basis than to offer cash discounts

2. Large buyers may take the cash discount as a matter of routine, even though the payment is not made within the discount period

3. During period of inflation, many firms experience a slow-down in the payment of bills by customers

Geographical Pricing DecisionsGeographical Pricing Decisions

• F.O.B. origin pricingF.O.B. origin pricing means the seller quotes prices from the point of shipment

• FFree ree OOn n BBoardoard means it is the buyer’s responsibility to select the mode of transportation, choose the specific carrier, handle any damage claims, and pay all shipping charges

Geographical Pricing Decisions

• Delivered pricingDelivered pricing means the price quoted by the manufacturer includes both the list price and transportation costs

• Single-zone pricing- the seller receives a different net return when transportation costs for customers vary

• Multiple-zone pricing- delivered prices are uniform within two or more zones

Geographical Pricing Decisions• F.O.B. with freight allowed- the buyer arranges and

pays for the transportation but deducts these transportation costs from the invoice total and remits the net amount

• Basing-point pricing- the delivered price is the product’s list price plus transportation costs from a basing point to the buyer

Home Assignment

• What are the advantages and disadvantages of Company wide basing point

• Answer Question 8,9 of Page 468

END OF CHAPTEREND OF CHAPTER