Adapting the Price

Companies usually do not set a single price but rather develop a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. As a result of discounts, allowances, and promotional support, a company rarely realizes the same profit from each unit of a product that it sells. Here we will examine several price-adaptation strategies: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing.

Geographical Pricing (Cash, Countertrade, Barter)

In geographical pricing, the company decides how to price its products to different customers in different locations and countries. Should the company charge higher prices to distant customers to cover higher shipping costs or a lower price to win additional business? How should it account for exchange rates and the strength of different currencies?

Another question is how to get paid. This issue is critical when buyers lack sufficient hard currency to pay for their purchases. Many want to offer other items in payment, a practice known as countertrade, and U.S. companies are often forced to accept if they want the business. One form of countertrade is barter, in which the buyer and seller directly exchange goods, with no money and no third party involved. A second form is a compensation deal, in which the seller receives some percentage of the payment in cash and the rest in products. A third form is a buyback agreement, as when the firm sells a plant, equipment, or technology to a company in another country and agrees to accept as partial payment products manufactured with the supplied equipment. A fourth form of countertrade is offset, where the firm receives full payment in cash for a sale overseas but agrees to spend a substantial amount of the money in that country within a stated time period.