Chapter 10: Adjustments to the list of quoted prices

Learning outcomes After studying this chapter, you should be able to: Understand the importance of price adjustments Define the term discounts Identify and explain discount tactics Provide practical application of discount tactics in a retail situation Identify price adjustment strategies Understand what allowances are Identify and explain the different types of allowances Provide practical illustrations of allowance applied in a retail situation Understand segment pricing Identify and explain psychological pricing techniques Understand when geographical pricing can be implemented Identify and explain geographical pricing techniques

Introduction After setting prices, more often than not companies will need to adjust their basic prices to account for various customer differences and changing situations. Companies do not make adjustment for various reasons The product is in high demand The product holds sufficient value for customers at its current price Companies have of options available for price adjustments Discount pricing Allowances

The importance of price adjustments Price adjustments are implemented to decrease the list price in an attempt to: Encourage awareness and interest in the product or Pay channel partners directly for the service they rendered when handling the products The price adjustment can venture into a different direction in various circumstances and can lead to price increases in order to cover extra costs incurred. High/low approach is used as some consumers are fixated with discounts

Discounts A discount is a reduction, usually stated as a percentage from the suggested retail price Common strategies used by organisations Quality discounts Cash discounts Functional discounts Seasonal discounts

Discounts cont… Quantity discounts Cash discounts Customers receive a quantity discount for buying in multiple units or above a specified rand amount. Types Cumulative quantity discounts Non-cumulative quantity discounts Cash discounts Price deductions obtainable to a consumer, an industry user, or marketing intermediaries in return for the timely payment of an invoice.

Discounts cont… Functional (or trade) discounts Seasonal discounts Distribution channel intermediaries should be reimbursed for the performance of a service or function provided. Seasonal discounts Price reduction for purchasing products out of season.

Allowances Allowances are reductions from list or quoted process offered to buyers for performing some activity. Allowances assist the buyer to make a new purchase more competently. Types of allowances Trade-in allowances Buy-bulk allowances Scan-back allowances Merchandise allowances Promotional allowances

Allowances cont… Trade-in allowances Buy-bulk allowances A price reduction given when a used product is part of the payment on a new product. Buy-bulk allowances A sum of money that a manufacturer presents to a reseller for each item the reseller purchased after an initial promotional agreement has been made. Scan-back allowances Is a manufacturer’s reward to retailers based on the number of pieces moved through the retailers scanners during a specific period.

Allowances cont... Merchandise allowances Promotional allowances The consensus of manufacturers to pay resellers a certain sum of money for promotional functions such as advertising or point of purchase displays. Promotional allowances The compensation to a wholesaler for promoting the manufacturers products.

Segment 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. Conditions for segment pricing to be successful The market should be segmentable. Cost of reaching the segment cannot exceed the extra revenue obtained from the price difference. Legal Segmented process should indicate real difference in customers perceived value.

Segment pricing cont… Conditions for utilising segmenting strategy The product should be suitable for various markets The product can be modified or packaged at minimal costs to fit the changing needs of customer groups if it is required. The various segments should not be competitive and shouldn’t violate or disobey any constraints. Forms of segmented pricing Customer-segment pricing. Product-form pricing. Location pricing. Time pricing.

Psychological pricing Psychological pricing is an understanding of where customer thought is used to determine the appropriate prices for products. Perception is the major contributor of psychology in pricing decisions. Physiological pricing relies on emotional reactions from the consumer. Prestige pricing is when the prestigious nature of a product is matched by an equally prestigious price.

Psychological pricing cont… Reference pricing are prices that buyers carry in their minds and refer to when looking a given product. Price quality relationships Difficult for consumers to assess a product’s quality, price may be used as an indicator of quality perception. Price communication Consumers evaluate price-value differently, depending on the way in which the price of a product is communicated. Odd prices Consumers perceive prices slightly below certain thresholds as substantially lower than the threshold.

Psychological pricing cont... Reference pricing Placing and displaying more expensively priced products next to less expensive products in the hope that consumers will use the higher prices as a comparison or reference price. Bundle pricing Packaging two or more products, usually complementary ones, to be sold at a single price. Behavioural forces Influences perception, knowledge and personality.

Geographical pricing Organisations and retailers should consider how to price their products for customers whom are located in different parts of the country or world. FOB-origin pricing Free on board pricing is when products are transported for free on board a carrier and customers carries the expenses of distributing the shipment from the factory to the final destination Uniform-delivered pricing When the organisation charge the same shipment fee to all customers, regardless of their location.

Geographical pricing cont… Zone pricing When the organisation sets a few zones eg suburbs and all customers whom fall into a specific zone are charged the same amount. Base point pricing A geographical pricing policy that includes the seller assigning some cities as a base point and the seller charges the customer the freight costs from that specific dome city to the customer.

Geographical pricing cont… Freight-absorption pricing When the seller absorbs all or part of the actual shipment costs to obtain the desired business. Postage stamp pricing The same price is charged to all customers in spite of their geographic location and the price is based on average shipping costs of all customers.

Summary After the pricing decision have been established, the next step is to consider whether there are benefits to making adjustments. Price adjustments come in the form of discounts and allowances. Establish the necessity of adjustments because they might change the perception of consumers on the quality if implemented unnecessarily.