TYPES OF PRICE DISCOUNTS

1. CASH DISCOUNTS:-

 It is for for prompt payment.

 They are intended to speed payment and

thereby provide liquidity to the firm.

 They are sometimes used as a

promotional device.
 Examples :-
 2/10 net 30 – buyer must pay within 30 days
, but will receive a 2% discount if they pay wit
hin 10 days.

 3/7 EOM – the buyer must pay by the End Of

the Month, but will receive a 3% discount if th
ey pay within 7 days.

 2/15 net 40 ROG – the buyer must pay withi

n 40 days of Receipt Of Goods, but will receiv
e a 2% discount if paid in 15 days.
2. QUANTITY DISCOUNTS:-

 These are price reductions given for large

purchases.

 The rationale behind them is to obtain

economies of scale.

 Pass some (or all) of these savings on to the custom

er
.

 Price discount may be offer equally to all customers.

 Examples:-

BUY SAVE NEW PRICE

12-23 15% I.63$ EACH

24-71 20% 1.54$ EACH

72 OR MORE 30% 1.34$ EACH

3. TRADE DISCOUNTS:-

 It is also called functional discounts.

 These are payments to distribution channel

members for performing some function
such as selling ,storing and recordkeeping.

 Combined to include a series of functions.

 EXAMPLES:-

 20/12/5 could indicate a 20% discount for

warehousing the product, an additional 12%
discount for shipping the product, and an
additional 5% discount for keeping the
shelves stocked.
 SEASONAL DISCOUNTS:-

 These are price reductions given when an

order is placed in a slack period.

 Hotels ,Motels and Airlines offer discount in

slow selling periods.
 EXAMPLE:

 purchasing skies in April in the northern

hemisphere, or in September in the southern
hemisphere.
PRICE DISCOUNTS AND ALLOWANCE
 Discounts and allowances are modifications
to the basic
price. They could modify either the manufact
urers list price , the retail
price or the list price.

 The purpose of discounts is to increase short

-term sales, move out-of-date stock, reward
valuable customers, or encourage
distribution channel members to perform a fu
nction
.
1. PROMOTIONAL ALLOWANCES :-

 These are price reduction given to the buyer

for performing some promotional activity.

 These include an allowance for creating and

maintaining an in-store display or a co-op
advertising allowance.
 TRADE IN ALLOWANCE:-

It is granted for turning in an old item when

buying a new one item.

EXAMPLE:-
As part of the sales approach, car lots may
advertise a specific minimum trade-in
allowance to anyone who purchases a new car
 GEOGRAPHICAL PRICING

 It
is the practice of modifying a basic list price
based on the geographical location of the buy
er.

 It is intended to reflect the costs of shipping t

o different locations.

 EXAMPLE:-
 TIDE
TYPES
 FOB origin - The shipping cost from the facto
ry or warehouse is paid by the purchaser

 Uniform delivery pricing - (also called postag

e stamp pricing) - The same price is charged
to all.

 Zone pricing - Prices increase as shipping dis

tances increase.
Promotional Pricing
Loss-leader Pricing
 Loss
leaders can be an important part of
companies' marketing and sales strategies,
especially during dumping campaigns.

 Supermarkets and department stores often

drop the price on well-known brand to
stimulate additional store traffic.
 When to Use Loss Leader Pricing

 1. Brand Awareness

 2. Increased Traffic

 3. Brand Awareness
 For example, you buy a portable TV from your
suppliers at £160 and the additional costs of
selling the TV add up to £40, totalling a break-
even selling price of £200. You sell the TV for a
reduced price of £189 therefore making a loss of
£11 for each one sold. But to the customers, they
will see this price as a bargain due to other shops
selling the TV at say, £230.

 An example is a supermarket selling sugar or

milk at less than cost to draw customers to that
particular supermarket.
Spacial-event Pricing

Seller will establish spatial prices in certain

seasons to draw in more customers.

For example every august there

are back to school sales.
Cash rebates
 A cash rebate is an amount paid by way of
reduction, return, or refund on what has
already been paid or contributed. It is a type
of sales promotion marketers use primarily as
incentives or supplements to product sales.

 For example, Kids eat free specials: Offers a

discount on the total dining bill by offering 1
free kids meal with each regular meal
purchased.
Low Interest Financing

Instead of cutting its price, the

company can offer customers low
interest financing.

For example
automakers have used no-interest
financing to try to attract more
custmers.
Longer Payment Term
Sellers, especially mortgage banks and auto
companies stretch loans over longer periods
and thus lower the monthly payments.
Warranties and Service Contracts

Companies can promote sales by adding a free

or low-cost warranty or service contract.
Psychological Discounting
This strategy involves setting an artificially
high price and then offering the product at
substantial savings.

For exam ”Was Rs. 359, now Rs. 299.

DIFFERENTIATED PRICING
Price discrimination
occurs when a company sells a product or
service at two or more prices that do not
reflect a proportional difference in costs.

Degree of discrimination:-

First degree price discrimination: separate

price of product to each customer
depending on demand intensity.
Second degree price discrimination:- less
price is charged to buyers who buy a larger
volume of products.
Third degree price discrimination:- the seller
charges different amounts to different to
different class of buyers as in following
cases:
Customer –segment pricing: different
customer pay different prices for same
product .
Ex: museum charges are low for students and
senior citizens.
 Product form pricing:- product is charged on
the basis of its attributes and styles on which
it is sold.
Ex: Big bazaar sells shirts in many styles, full
sleeve shirt may cost Rs 250 to Rs 600
 Image Pricing:-some products are priced at

two different levels based on appearance ,

common in cosmetics and garments.
 Channel Pricing:-product is charged

differently to buyers based on the different

mode by which it is obtained.
 Location Pricing:- the same product is
priced differently at different locations even
though the cost of offering at each location
is the same.
Ex:-theatre seat prices varies according to
audience preferences at different locations.
 Time pricing:- prices are varied by seasons,

day or hour.
Ex:- restaurants charge less to “early bird”
customers and some hotels charge less on
weekends like at hill stations during the on
season hotels have different packages
Examples of price discrimination

Travel industry
 Airlines and other travel companies use

differentiated pricing regularly, as they sell

travel products and services simultaneously
to different market segments. They charge
differently to passengers depending on
seating classes or status. Discounts for
members of certain occupations
 Many businesses, military members

especially in the Southern United States,

offer reduced prices
CONDITIONS
1. The market must be segmentable and the
segments must show different intensities of
demand.
2. The members in the lower price segment
must not be able to resell the product to the
higher price segment .
3. The competitors must not be able to undersell
the firm in higher price segment.
4. The cost of segmenting and policing the
market must not exceed the extra revenue
derived from the price discrimination
5 . The practice must not breed customer
resentment and ill will.
6 . The price discrimination must not be illegal.
INITIATING PRICE CUTS

Several circumstances might lead a firm to cut
prices-

1.EXCESS PLANT CAPACITY-The firm needs

additional business and cannot generate it through
increased sales effort , product improvement etc.

2.DRIVE TO DOMINATE THE MARKET-Companies

sometimes initiate price cuts in the hope of
gaining market share.
However price-cutting strategy can
lead to following traps-

LOW QUALITY TRAP-The consumers assume
that the quality is low.

FRAGILE-MARKET SHARE TRAP-A low price
buys market share but not market loyalty.

SHALLOW-POCKETS TRAP-Higher priced
competitors match the lower prices but have
longer staying power because of deeper cash
reserves.

PRICE-WAR TRAP-Competitors respond by
lowering their prices even more,triggering a
price war.
INITIATING PRICE INCREASES
A successful price increase can raise profits
considerably.Following factors provoke price
increases-

COST INFLATION-Substantial increase in the
cost squeezes the profit margins of the
companies and thus lead to price increases.

OVERDEMAND-When the demand for a
product is very high and the company cannot
supply to all its customers,it can raise its
prices.
The price can be increased in the
following ways-

DELAYED QUOTATION PRICING-The company
does not set a final price until the product is
finished or delivered.

ESCALATOR CLAUSES-The company requires
the customer to pay today's price and all or a
part of any inflation increase that takes place
before delivery.

UNBUNDLING-The company maintain its
prices but removes or prices separately one
or more elements that were part of the
former offer like- free delivery or
installation.
FOLOWING ARE THE WAYS USED BY
MARKETERS TO AVOID PRICE
INCREASE-

Shrinking the amount of product instead of
increasing the price.

Substituting less expensive material or
ingredients.

Reducing product features.

Using less expensive packaging materials.

Reducing the number of sizes and models
offered.

Creating new economy brands.
 Responding to competitor’s
price changes
The company must consider the product’s stage in the life cycle, its
importance in the company’s portfolio , the competitor’s intentions
and resources , the market price and quality sensitivity , the behavior
of cost with volume and the company’s alternative opportunities .
 RESPONDING TO
COMPETITORS PRICE CHANGES

A Framework to show responding to low-cost

Rivals
 ASK
ASK
Will
Will the
the
company
company Watch, but
take
take away
away
any
any of my
of my don’t take on
present
present or
or NO the new rival.
future
future
customer?
customer?

YES
Don’t launch a price war. Increase the
differentiation of your products by using a
combination of tactics.

ASK
ASK
Intensity differentiation by offering
Are sufficient
Are sufficient YES more benefits . Over time ,
number
number of
consumers
of
consumers willing
willing to
to
restructure your company to
pay more for the
pay more for the reduce the price of the benefits
benefits
benefits II offer?
offer?
you offer.
NO
Learn to live with
a smaller
company . If
possible , merge
with or take over
rivals .
 ASK
ASK
If
If II set
set up
up a
a
low-cost
low-cost
business
business ,, YES Attack your low-cost rival
will
will it
it
generate
generate by setting up a low-cost
synergies
synergies
with
business.
with my my
existing
existing
business
business ??
NO

Switch to selling
solutions or
transform your
company into a low-
cost player.
 The market having high product homogeneity
the firm can search for ways to enhance its
augmented product.

 If it cannot find any , it needs price

reduction.

 If the competitor raises its price in the

homogeneous market and industry is not
benefitted the other firms will not match its
prices.
In heterogeneous market following
issues are considered
 Why did competitor change the price ?To steal
the market , to utilize excess capacity , to meet
changing cost conditions or to lead an industry-
wide price change ?
 Does the competitor plan to make the price

changes temporary or permanent ?

 What will happen to the company’s market share

and profit if it does not respond? Are other

companies going to respond ?
 What are the competitors and other firms’

responses likely to be each possible reaction ?

 LEGAL ASPECTS AND
ETHICS IN PRICING
With the change in price and market
condition, the firm needs to control the
market in terms of product quality or
advertisement, they often engage in
pricing practices which may lead to
unfairly reduce in competition or harm
consumer through fraud and deception.
 Some laws and regulations have been
made at federal and state level to prevent
unfair practices.
Certain frauds and deception
involved in pricing
1. Deceptive or illegal price advertising
2. Predatory pricing
3. Price discrimination
4. Price fixing
Deceptive or illegal advertising
Descriptive reference price:
 The reference price of the product should be

reasonable.
 If the price is inflated, the advertisement

therefore is deceptive and may cause harm to

consumers.
 If a seller labels a price as a regular price, the

better bureau suggests that at least 50% of

sales have occurred at that price.
Loss leader pricing
 Seller lowers the price below the stores cost.

Bait and switch

 The store offers product at very low price so

that customers are attracted towards high

priced model.
Predatory pricing
 A firm sets low price for one or more of its
products with with the intent to drive itself
out of competition.
 It is illegal under both the Sherman Act and

the Federal Trade Commission Act.

Price discrimination
 A firm sells the same product to different
resellers at different prices.

 It is illegal under the Clayton Act and the

Robinson-Patman Act.
 Price Fixing
Price fixing is an agreement between participants on
the same side in a market to buy or sell a product,
service, or commodity only at a fixed price.

1)The intent of price fixing may be to push the price of a product

as high as possible, leading to profits for all sellers, but it may
also have the goal to fix, peg, discount, or stabilize prices.

2)Price fixing requires a conspiracy between sellers or buyers;

the purpose is to coordinate pricing for mutual benefit of the
traders.
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 Horizontal Price Fixing
1)Horizontal price fixing-generally illegal arrangement
among competitors to charge the same price for an
item.

2) Horizontal Price fixing occurs when competitors that

produce and sell competing products collude, or
work together, to control prices, effectively taking
price out of the decision process for consumers.

01/11/10
 Vertical Price Fixing
1) It is an illegal arrangement in which parties at
different levels of production and distribution act to
fix the market price of goods (e.g.,manufacturers
and retailers).

2) In the music industry case, prosecutors alleged that

the music companies colluded with music retailers to
maintain retail prices for CDs.

01/11/10
1) Whereas horizontal price fixing is clearly
illegal under Sherman Antitrust Act, vertical
price fixing falls into a gray area.
2) Thus, the practice of vertical price fixing is not
always illegal but rather must be reviewed on
a case-by-case basis to determine its legality.

01/11/10