Week 9.4 Special Adjustments to List Price
You have seen steps 1, 2, 3, and 4 in the process of setting a price in the previous lessons. In this lesson, we will cover steps 5 and 6 in the process.
Step 5: Set the List or Quoted Price
There are two applications we should consider: one-price vs. flexible-price policy.
A one-price policy means that there is a single price for any buyer who enters the store or places an order. It is also called fixed pricing.
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Example: Some retailers such as dollar stores use this policy and sell everything in their stores for $1-$2 or less. Recently $3-$4 items have also started to appear in such stores.
A flexible-price policy refers to different prices for products/services depending on individual buyers and purchase situations. It is also called dynamic pricing.
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Example: Yellow Pages Group charges more for advertising in categories that produce more sales for the client, and less for categories that do not lead to significant increases in sales.
It is possible to apply price customization up to some degree. For example, online marketers routinely adjust prices in response to purchase situations. There is no cost to price changes in an online environment other than the labour of the person who is making the changes on the computer. On the other hand, there are costs to changing prices in businesses that are not online. We mentioned such costs in earlier lessons including printing new menus and catalogs, and going through the shelves with scanners and placing new labels.
A popular pricing strategy for online or digital service providers is the freemium pricing model. In this case, the basic version of the service is offered for free to all consumers for a limited time. As the customers enjoy the free version and realize the value that they get from the service/product, they become willing to pay for it. Another version of the freemium model is to offer the basic version for free for an unlimited time but release an advanced version with added features and charge for the advanced version.
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The freemium model is used for many online products/services such as software, games, and web services. Dropbox is a good example.
Step 6: Make Special Adjustments to the List or Quoted Price
In the last step, we make special adjustments to the quoted price. There are three types of special adjustments:
- Geographical adjustments
A manufacturer applies discounts to wholesalers, retailers, or customers in order to encourage desirable behaviour such as large orders, out of season orders, or faster payment.
We will consider 4 kinds of discounts:
- Quantity discounts
- Seasonal discounts
- Trade discounts
- Cash discounts
Quantity discounts are applied to encourage customers to buy larger quantities. The buyer pays a lower price per unit when a large order is placed.
Seasonal discounts help manufacturers in managing their limited capacity. For certain products, there is high demand in certain seasons and almost no demand in other seasons. Manufacturers might have difficulty satisfying the demand during the high season with their limited capacity. Seasonal discounts lower the price during the low-demand season in order to encourage buyers to place their orders prior to the high season. This enables manufacturers to smooth out seasonal manufacturing peaks.
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Toro’s snow throwers are high in demand during the winter season. Toro offers seasonal discounts to encourage wholesalers and retailers to stock up on snow throwers in July. Similarly, Toro offers seasonal discounts on lawn mowers in January.
Trade (functional) discounts are provided to reward wholesalers and retailers for marketing functions they will perform in the future for the manufacturer’s product.
Cash discounts are applied to encourage retailers to pay their bills quickly. For example, the retailer receives 2% discount if payment is made within 10 days.
Allowances are very much like discounts. They are reductions from the list or quoted prices to encourage buyers to perform some activity. There are trade-in allowances and promotional allowances.
Trade-in allowances are when the buyer’s used good counts as part of the purchase price.
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A car dealer offers you a trade-in allowance of $1,000 for your Chevrolet as a reduction in the list price of a new Toyota Camry.
Promotional allowances are granted to qualified intermediaries in the channel of distribution for undertaking advertising activites to promote a product. Some of these allowances are in the form of cash. An actual cash payment could be provided by the manufacturer to the seller. Alternatively, it could be an extra amount of "free goods".
The manufacturer provides a free case of frozen pizzas to a retailer for every dozen cases ordered by the retailer.
In most cases, retailers pass a portion of these savings to the consumer in the form of price reductions.
Manufacturers spend large amounts of money in paying promotional allowances. Some manufacturers such as Procter & Gamble decided to reduce promotional allowances to retailers. Instead the manufacturers are applying everyday low pricing (EDLP) to the customer. EDLP is the practice of replacing promotional allowances with lower manufacturer list prices.
Geographical adjustments are related to the cost of transportation of the products from seller to buyer. There are two types of geographical adjustments: FOB origin pricing, and uniform delivered pricing.
FOB means "free on board". In the case of FOB origin pricing, the seller pays the cost of loading the product onto the vehicle. Usually the seller names the location of this loading such as "FOB Toronto". The title to the goods passes to the buyer at the point of loading. After loading, the buyer becomes responsible for picking the specific mode of transportation, for all transportation costs, and for subsequent handling of the product.
In uniform delivered pricing, the price the seller quotes includes all transportation costs. It simply means "FOB buyer's location". The seller selects the mode of transportation, pays the freight charges, and is responsible for any damages that may occur (since the seller retains title to the goods until delivered to the buyer). The cost of transportation belongs to the seller.