Chapter 9 Developing A Price Structure Price Administration

Chapter 9 Developing A Price Structure

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 • Trade based on a distributor’s place in the distributive sequence • Functional 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 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 offpeak periods • Usually in Electric or Telecommunication sectors – Time of day pricing

Quantity Discounts • Most common type of discount • This discount is granted for Volume purchases (measured in dollars or units)

Example: Applying Discounts: 10 ladders @ $30 6 ladders @ $50 10 ladders @ $90 5 ladders @ $120 4 ladders @ $150 Total $ 300 900 600 $ 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 Discount, $2, 700 x 0. 05 Net order amount $ 2, 700 135 $ 2, 565

Applying Trade Discounts Net order amount $ 2, 565. 00 Less: 40% discount Less: 5% discount 1, 026. 00 $ 1, 539. 00 153. 90 $ 1, 385. 10 69. 26 Amount due manufacturer $ 1, 315. 84 Less: 10% discount

Applying Cash Discount Amount due manufacturer Less: 3 % discount Net Remittance $ 1, 315. 84 39. 48 $ 1, 276. 36

Price Discount Structures

Fixed (Uniform) Price Total Revenue TR Unit Price Quantity

Quantity Discount (All Units) Total Revenue TR Unit Price Quantity

Uniform Two-Part Prices Total Revenue Fixed TR Unit Price Quantity

Two-Block Prices Total Revenue TR Unit Price Quantity

2 Two-Part Prices Total Revenue TR 1 TR 2 Fixed Unit Price Quantity

Price Points Total Revenue • • • TR • Unit Price Quantity