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Developing A Price Developing A Price StructureStructure
Chapter 9
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
• 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
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 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
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 off-peak periods
• Usually in Electric or Telecommunication sectors– Time of day pricing
QQuantityuantity DiscountsDiscounts
• Most common type of discount
• This discount is granted for Volume purchases (measured in dollars or units)
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
Applying Quantity Discount
Total order amount $ 2,700
Discount, $2,700 x 0.05 135
Net order amount $ 2,565
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
Applying Cash Discount
Amount due manufacturer $ 1,315.84
Less:3 % discount 39.48
Net Remittance $ 1,276.36
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
Fixed (Uniform) Price
Total Revenue
Quantity
TR
Unit Price
Quantity Discount (All Units)
Total Revenue
Quantity
TR
Unit Price
Uniform Two-Part Prices
Total Revenue
Quantity
TR
Unit PriceFixed
Two-Block Prices
Total Revenue
Quantity
TR
Unit Price
2 Two-Part Prices
Total Revenue
Quantity
TR1
TR2
Unit PriceFixed
Price Points
Total Revenue
Quantity
•
•
•
•
•
•
TR
Unit Price