Price Discounts and Allowances

Most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying (see Table 11.2). Companies must do this carefully or find their profits much lower than planned.25 Some product categories self-destruct by always being on sale. Manufacturers should consider the implications of supplying retailers at a discount because they may end up losing long-run profits in an effort to meet short-run volume goals. Upper management should conduct a net price analysis to arrive at the “real price” of the offering, which is affected by discounts and other expenses.

Promotional Pricing

Companies can use several pricing techniques to stimulate early purchase:

  • Loss-leader pricing. Stores often drop the price on well-known brands to stimulate store traffic. This pays if the revenue on the additional sales compensates for the lower loss-leader margins. Manufacturers of loss-leader brands typically object because this practice can dilute the brand image and bring complaints from retailers who charge the list price.
  • Special event pricing. Sellers establish special prices in certain seasons to draw in more customers, such as back-to-school sales.
  • Special customer pricing. Sellers offer special prices exclusively to certain customers, such as members of a brand community.

TABLE 11.2 Price Discounts and Allowances

Discount:

A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,” which means payment is due within 30 days and the buyer can deduct 2 percent by paying within 10 days.

Quantity Discount:

A price reduction to those who buy large volumes. A typical example is “$10 per unit for fewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller. They can be offered on each order placed or on the number of units ordered over a given period.

Functional Discount:

Discount (also called trade discount) offered by a manufacturer to trade-channel members if they perform certain functions, such as selling, storing, and record keeping. Manufacturers must offer the same functional discounts within each channel.

Seasonal Discount:

A price reduction to those who buy merchandise or services out of season. Hotels and airlines offer seasonal discounts in slow selling periods.

Allowance:

An extra payment designed to gain reseller participation in special programs. Trade-in allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs.

  • • Cash rebates. Auto companies and others offer cash rebates to encourage purchase of the manufacturers’ products within a specified time period, clearing inventories without cutting the stated list price.
  • • Low-interest financing. Instead of cutting its price, the company can offer low-interest financing.
  • • Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the cost (the interest rate) of a loan and more about whether they can afford the monthly payment.
  • • Warranties and service contracts. Companies can promote sales by adding a free or low-cost warranty or service contract.
  • • Psychological discounting. This strategy sets an artificially high price and then offers the product at substantial savings; for example, “Was $359, now $299" The Federal Trade Commission and Better Business Bureau fight illegal discount tactics.

Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them and they lose their effectiveness. If they don’t work, they waste money that could have been put into other marketing tools, such as building up product quality and service or strengthening product image through advertising.

 
Source
< Prev   CONTENTS   Source   Next >