PRICE THE 2ND P OF MARKETING MIX:Discount and Allowance Pricing, Segmented Pricing

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Principles of Marketing MGT301

Lesson 26

Lesson overview and learning objectives:

We have already discussed the different factors affecting pricing decisions and approaches that can

be used to price the product/services, today we will discuss price-adjustment strategies. Price-

adjustment strategies account for customer differences and start changing situations, and strategies

for initiating and responding to price changes

PRICE THE 2ND P OF MARKETING MIX.

A. Price-Adjustment Strategies

Companies usually adjust their basic prices to account for various customer differences and

changing situations. Fig summarizes six price-adjustment strategies: discount and allowance

pricing, segmented pricing,

psychological

pricing,

D is c o u n t a n d A llo w a n c e

promotional

pricing,

P r ic in g

geographical pricing, and

international pricing.

S e g m e n te d P r ic in g

s y c h o lo g ic a l P r ic in g

a. Discount

and

P r o m o tio n a l P r ic in g

Allowance Pricing

Most companies adjust their

G e o g r a p h ic a l P r ic in g

basic price to reward

customers

for

certain

In te r n a t io n a l P r ic in g

responses, such as early

payment of bills, volume purchases, and off-season buying. These price adjustments--called

discounts and allowances--can take many forms.

A cash discount is a price reduction to buyers who pay their bills promptly. A typical example is

"2/10, net 30," which means that although payment is due within 30 days, the buyer can deduct 2

percent if the bill is paid within 10 days. The discount must be granted to all buyers meeting these

terms. Such discounts are customary in many industries and help to improve the sellers' cash

situation

and

reduce bad debts

and

credit-

Adjusting Basic Price to Reward Customers

collection costs.

quantity

For Certain Responses

discount is a price

reduction to buyers

who buy large

volumes. A typical

Cash Discount

Seasonal Discount

example might be

"Rs10 per unit for

less than 100 units,

Quantity Discount

T rade-In Allow ance

Rs9 per unit for

100 or more units."

By law, quantity

Functional Discount

Prom otional Allow ance

discounts must be

offered equally to

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Principles of Marketing MGT301

all customers and must not exceed the seller's cost savings associated with selling large quantities.

These savings include lower selling, inventory, and transportation expenses. Discounts provide an

incentive to the customer to buy more from one given seller, rather than from many different

sources.

A functional discount (also called a trade discount) is offered by the seller to trade channel

members who perform certain functions, such as selling, storing, and record keeping.

Manufacturers may offer different functional discounts to different trade channels because of the

varying services they perform, but manufacturers must offer the same functional discounts within

each trade channel.

A seasonal discount is a price reduction to buyers who buy merchandise or services out of

season. For example, lawn and garden equipment manufacturers offer seasonal discounts to

retailers during the fall and winter months to encourage early ordering in anticipation of the heavy

spring and summer selling seasons. Hotels, motels, and airlines will offer seasonal discounts in

their slower selling periods. Seasonal discounts allow the seller to keep production steady during an

entire year.

Allowances are another type of reduction from the list price. For example, trade-in allowances are

price reductions given for turning in an old item when buying a new one. Trade-in allowances are

most common in the automobile industry but are also given for other durable goods. Promotional

allowances are payments or price reductions to reward dealers for participating in advertising and

sales support programs.

Segmented Pricing

Companies will often adjust their basic prices to allow for differences in customers, products, and

locations. In segmented pricing, the company sells a product or service at two or more prices, even

though the difference in prices is not based on differences in costs.

Segmented pricing takes several forms. Under customer-segment pricing, different customers pay

different prices for the same product or service. Museums, for example, will charge a lower

admission for students and senior citizens. Under product-form pricing, different versions of the

product are priced differently but not according to differences in their costs. Using location

pricing, a company charges different prices for different locations, even though the cost of offering

at each location is the same. For instance, theaters vary their seat prices because of audience

preferences for certain locations. Finally, using time pricing, a firm varies its price by the season,

the month, the day, and even the hour. Public utilities vary their prices to commercial users by time

of day and weekend versus weekday. The telephone company offers lower off-peak charges, and

resorts give seasonal discounts.

For segmented pricing to be an effective strategy, certain conditions must exist. The market must

be segmentable, and the segments must show different degrees of demand. Members of the

segment paying the lower

price should not be able to

turn around and resell the

Selling Products At Different Prices Even

product to the segment

paying the higher price.

Though There is No Difference in Cost

Competitors should not be

able to undersell the firm in

the segment being charged

the higher price. Nor should

Custom er - Segm ent

Location Pricing

the costs of segmenting and

watching the market exceed

the extra revenue obtained

Product - Form

Tim e Pricing

from the price difference. Of

course,

the

segmented

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Principles of Marketing MGT301

pricing must also be legal. Most importantly, segmented prices should reflect real differences in

customers' perceived value. Otherwise, in the long run, the practice will lead to customer

resentment and ill will.

c. Psychological Pricing

Price says something about the product. For example, many consumers use price to judge quality.

An Rs1000 bottle of perfume may contain only Rs300 worth of scent, but some people are willing

to pay the Rs 1000 because this price indicates something special.

In using psychological pricing, sellers consider the psychology of prices and not simply the

economics. For example, one study of the relationship between price and quality perceptions of

cars found that consumers perceive higher-priced cars as having higher quality. By the same token,

higher-quality cars are perceived to be even higher priced than they actually are. When consumers

can judge the quality of a product by examining it or by calling on past experience with it, they use

price less to judge quality. When consumers cannot judge quality because they lack the information

or skill, price becomes an important quality signal:

Another aspect of psychological pricing is reference pricing--prices that buyers carry in their

minds and refer to when looking at a given product. The reference price might be formed by

noting current prices, remembering past prices, or assessing the buying situation. Sellers can

influence or use these consumers' reference prices when setting price. For example, a company

could display its product next to more expensive ones in order to imply that it belongs in the same

class. Department stores often sell women's clothing in separate departments differentiated by

price: Clothing found in the more expensive department is assumed to be of better quality.

Companies can also influence consumers' reference prices by stating high manufacturer's suggested

prices, by indicating that the product was originally priced much higher, or by pointing to a

competitor's higher price.

d. Promotional pricing,

Companies will temporarily price their products below list price and sometimes even below cost.

Promotional pricing takes several forms. Supermarkets and department stores will price a few

products as loss leaders to attract customers to the store in the hope that they will buy other items

at normal markups. Sellers will also use special-event pricing in certain seasons to draw more

customers. Manufacturers will sometimes offer cash rebates to consumers who buy the product

from dealers within a specified time; the manufacturer sends the rebate directly to the customer.

Rebates have been popular with automakers and producers of durable goods and small appliances,

but they are also used with consumer-packaged goods. Some manufacturers offer low-interest

financing, longer warranties, or free maintenance to reduce the consumer's "price." This practice

has recently become a favorite of the auto industry. Or, the seller may simply offer discounts from

normal prices to increase sales and reduce inventories.

Promotional pricing, however, can have adverse effects. Used too frequently and copied by

competitors, price promotions can create "deal-prone" customers who wait until brands go on sale

before buying them. Or, constantly reduced prices can erode a brand's value in the eyes of

customers. Marketers sometimes use price promotions as a quick fix instead of sweating through

the difficult process of developing effective longer-term strategies for building their brands. In fact,

one observer notes that price promotions can be downright addicting to both the company and the

customer. The point is that promotional pricing can be an effective means of generating sales in

certain circumstances but can be damaging if taken as a steady diet.

e. Geographical Pricing

A company also must decide how to price its products for customers located in different parts of

the country or world. Should the company take risk of losing the business of more distant

customers by charging them higher prices to cover the higher shipping costs? Or should the

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Principles of Marketing MGT301

company charge all customers the same prices regardless of location? Because each customer picks

up its own cost, supporters of FOB pricing feel that this is the fairest way to assess freight charges.

The disadvantage, however, is that Peerless will be a high-cost firm to distant customers?

Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same

price plus freight to all customers, regardless of their location. The freight charge is set at the

average freight cost. Other advantages of uniform-delivered pricing are that it is fairly easy to

administer and it lets the firm advertise its price nationally.

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets

up two or more zones. All customers within a given zone pay a single total price; the more distant

the zone, the higher the price. Using base point pricing, the seller selects a given city as a "basing

point" and charges all customers the freight cost from that city to the customer location, regardless

of the city from which the goods are actually shipped. If all sellers used the same basing-point city,

delivered prices would be the same for all customers and price competition would be eliminated.

Industries such as sugar, cement, steel, and automobiles used basing-point pricing for years, but

this method has become less popular today. Some companies set up multiple basing points to

create more flexibility: They quote freight charges from the basing-point city nearest to the

customer.

Finally, the seller who is anxious to do business with a certain customer or geographical area might

use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight

charges in order to get the desired business. The seller might reason that if it can get more

business, its average costs will fall and more than compensate for its extra freight cost. Freight-

absorption pricing is used for market penetration and to hold on to increasingly competitive

markets.

f. International Pricing

Companies that market their products internationally must decide what prices to charge in the

different countries in which they operate. In some cases, a company can set a uniform worldwide

price. The price that a company should charge in a specific country depends on many factors,

including economic conditions, competitive situations, laws and regulations, and development of

the wholesaling and retailing system. Consumer perceptions and preferences also may vary from

country to country, calling for different prices. Or the company may have different marketing

objectives in various world markets, which require changes in pricing strategy. Costs play an

important role in setting international prices. Travelers abroad are often surprised to find that

goods that are relatively inexpensive at home may carry outrageously higher price tags in other

countries. In some cases, such price escalation may result from differences in selling strategies or

market conditions. In most instances, however, it is simply a result of the higher costs of selling in

foreign markets--the additional costs of modifying the product, higher shipping and insurance

costs, import tariffs and taxes, costs associated with exchange-rate fluctuations, and higher channel

and physical distribution costs.

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