Developing A Price Structure Chapter 9. Price Administration Price administration is also concerned...

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Developing A Price Developing A Price Structure Structure Chapter 9

Transcript of Developing A Price Structure Chapter 9. Price Administration Price administration is also concerned...

Page 1: Developing A Price Structure Chapter 9. Price Administration Price administration is also concerned with handling price adjustments for sales made under.

Developing A Price Developing A Price StructureStructure

Chapter 9

Page 2: Developing A Price Structure Chapter 9. Price Administration Price administration is also concerned with handling price adjustments for sales made under.

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.

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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

Page 4: Developing A Price Structure Chapter 9. Price Administration Price administration is also concerned with handling price adjustments for sales made under.

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

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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

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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.

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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

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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

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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.

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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

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QQuantityuantity DiscountsDiscounts

• Most common type of discount

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

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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

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Applying Quantity Discount

Total order amount $ 2,700

Discount, $2,700 x 0.05 135

Net order amount $ 2,565

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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

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Applying Cash Discount

Amount due manufacturer $ 1,315.84

Less:3 % discount 39.48

Net Remittance $ 1,276.36

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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

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Fixed (Uniform) Price

Total Revenue

Quantity

TR

Unit Price

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Quantity Discount (All Units)

Total Revenue

Quantity

TR

Unit Price

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Uniform Two-Part Prices

Total Revenue

Quantity

TR

Unit PriceFixed

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Two-Block Prices

Total Revenue

Quantity

TR

Unit Price

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2 Two-Part Prices

Total Revenue

Quantity

TR1

TR2

Unit PriceFixed

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Price Points

Total Revenue

Quantity

TR

Unit Price