1. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 16 Developing A Price Structure

2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Managing Transactions In many firms, different people or organization units play a role in price adjustments, such as various discounts, loyalty refunds, advertising allowances, trade deals, price promotions, freight allowances, … Thus, it is important to distinguish between –List price –List price - published or generally quoted unit price –Invoice price –Invoice price - price after usual volume, trade, and cash discounts –Pocket price –Pocket price - price after all allowances, refunds and discounts

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 PromotionalPromotional- given to distributors as an allowance for the distributors’ efforts to promote the manufacturer’s product through local advertising, special displays, or other promotions

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Discounts CashCash- reward for the payment of an invoice or an account within a specified period of time Advance-purchaseAdvance-purchase- lower prices for early purchases Peak-load pricingPeak-load pricing- higher prices during periods of higher demand, and lower prices during off-peak periods QuantityQuantity- granted for volume purchases

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Cash Discounts 1.To encourage prompt payment of invoices 2.To reduce credit risks and the cost of collecting overdue accounts 3.To follow industry or historical practice

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Problems of Cash Discounts 1.It may be more economical for a firm to borrow money on a short-term basis than to offer cash discounts 2.Large buyers may take the cash discount as a matter of routine, even though the payment is not made within the discount period 3.During period of inflation, many firms experience a slow-down in the payment of bills by customers

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Geographical Pricing Decisions F.O.B. origin pricingF.O.B. origin pricing means the seller quotes prices from the point of shipment Free On BoardFree On Board means it is the buyer’s responsibility to select the mode of transportation, choose the specific carrier, handle any damage claims, and pay all shipping charges

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Geographical Pricing Decisions Delivered pricingDelivered pricing means the price quoted by the manufacturer includes both the list price and transportation costs Single-zone pricing- the seller receives a different net return when transportation costs for customers vary Multiple-zone pricing- delivered prices are uniform within two or more zones

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 17 Pricing To and Through the Channel

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Legal Status of Functional Discounts Discounts are lawful if they are offered to all competing buyers of the same distribution class on the same terms and if the discounts accurately reflect cost savings to the seller –It is unlawful to discriminate in price when the effect may be to lessen or injure competition –Generally wholesalers have been given larger discounts than retailers

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Channel Structures

12. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Consumer Promotions Price-off promotionsPrice-off promotions involve temporary price reductions to retailers with the intent that savings will be passed along to consumers RebatesRebates reduce profits for companies and dealers, but help move inventory, keep product lines open, and help manufacturers and dealers survive during difficult times CouponsCoupons offer buyers price reductions at the point of sale

13. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Promotions  The underlying objective of a price promotion to final customers should be to focus on a price/market segment that is more price sensitive or deal responsive than existing buyers  If buyers do not perceive that there is a "deal" or that there is an enhancement in value, the discount strategy may not have the desired impact on revenues

14. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Promotion as Price Discrimination Why aren’t all coupons redeemed? The perceived cost of redeeming coupons or qualifying for the rebate is larger than the perceived value of the coupon or rebate for some buyers –This allows the market to divide into two price segments

15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Who Redeems Coupons? 1. A higher percentage of coupon redemptions are by nonloyal buyers and by buyers of low-share brands 2. Higher coupon values are more likely to be redeemed by nonbuyers than lower values. The lower values are more likely to be redeemed by loyal and semi-loyal buyers 3. Direct mail produces more redemptions by nonbuyers 4. There is a lower percentage of female heads of households employed full time in the heavy coupon user group

16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Immediate Effects of Price and Sales Promotions There is a significant impact on brand sales. Brand switchers account for most of the sales increase. The brand switching effect differs across brands. Different forms of promotion have different effects on sales.

17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Intermediate Effects of Price and Sales Promotions Whether promotions lead to repeat purchases is unclear. The immediate sales effect is due to purchase acceleration. –Purchase acceleration occurs either because loyal consumers buy larger quantities when the brand is promoted and/or purchase the brand sooner than normal. –Forward buying is the purchasing of a product earlier than normal. Increased price promotions can reduce baseline sales.

18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Long-Term Effects of Price and Sales Promotions Concerns the ability of the brand to develop a loyal following among its customers –Buyers become loyal to the deal –Consumers associate a frequently promoted brand with lower product quality –The strong short-term effects of price promotions weakens over time and rarely results in permanent shifts in category demand

19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Requirements For Segmented Pricing 1. Market segments must be separable. –Sensitivities to price differences. –Different channels of distribution available. Need to minimize leakage and diversion. 2. The different market segments must have different price sensitivities and/or the firm must incur different variable costs of serving the segments. on a temporary basisPrice promotions provide an opportunity to differentiate segments on the basis of price on a temporary basis.

20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of Every Day Pricing Makes it easier to communicate to customers and to establish a particular price image May help reduce operating costs –Reduced inventory and handling costs due to steady and more predictable demand –Reduced labor costs related to less frequent temporary price reductions

21. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Matching Guarantees A price matching guarantee is a seller’s policy and practice of actively matching a lower price offered by other sellers on an identical or similar item or refunding the price difference for a period of time after the sale has been made Effect on competition and market prices

22. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 18 Legal Aspects of Pricing Strategy

23. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Problem With the Justification of Price Differentials This problem may arise –1. When a customer believes that he or she has been illegally charged a price higher than the price charged to other customers for the same product –2. When a competitor believes that a rival’s prices are lower in markets where they both compete than in markets where they do not compete

24. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Problem With the Justification of Price Differentials This problem may arise –3. When the government believes that competing customers of a seller are charged different prices –4. When price changes might be justified to customers, sales force, or a price control board

25. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Collusion CollusionCollusion among business rivals inevitably leads to a monopoly outcome, typically higher prices and profits that are shared by the colluding organizations 1. Raise prices by restricting output or by dividing the market into competition-free sub-markets 2. Reduce rivals’ revenues through boycotts or predatory pricing 3. Impose rules of competition on the members of the cartel

26. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Fixing Price fixingPrice fixing Sherman Anti-Trust Act (1890) Addresses issues related to: –Price fixing – Exchanging price information – Price signaling – Also affects issues of predatory pricing

27. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Fixing Exchanging price informationExchanging price information –A legal issue arises when there is an apparent agreement to set prices based on the exchanged price information Parallel Pricing and Price SignalingParallel Pricing and Price Signaling –Parallel pricing is where firms follow price changes made by the price leader in an industry –Price signaling is when sellers achieve a common understanding about prices and price changes through public announcements

28. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Predatory Pricing Predatory pricingPredatory pricing –Predatory pricing is the cutting of prices to unreasonably low and/or unprofitable levels so as to drive competitors from the market –If the price cutting is successful in driving out competitors, then the price cutter may have acquired a monopoly position via unfair means of competition- a violation of section 2 of the Sherman Act

29. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Discrimination Clayton Act (1914); Later amended by Robinson-Patman Act (1936)Clayton Act (1914); Later amended by Robinson-Patman Act (1936) illegal –Prohibits illegal price discrimination, not price differences per se. Economic bases: –Price differences not justified by cost differences or by changes in demand. –Two or more buyers of same product or service are charged same price despite differences in costs of serving these buyers.

30. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Trade Commission Act The Federal Trade Commission Act (1914)The Federal Trade Commission Act (1914) –Established the Federal Trade Commission, prohibited “unfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce” –Wheeler-Lea Act (1938) Protection of the public from deceptive business practices Prohibits false and misleading advertising and provides more stringent penalties and enforcement procedures

31. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Affirmative Defenses Defense of meeting competitionDefense of meeting competition- a seller may reduce prices in a good-faith attempt to meet an equally low and lawful price of a competitor Changing conditions of defenseChanging conditions of defense- prices may be changed to reflect changing market conditions or changes in the marketability of the product

32. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Affirmative Defenses Cost justification defenseCost justification defense- defense used if the price differentials “make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered”

33. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Resale Price Maintenance Resale price maintenanceResale price maintenance is the specification by the supplier of the prices below or above which channel members may not sell the supplier's products. The issue revolves around the extent that manufacturers may control prices at which their prices are resold. – The most important point of a resale price maintenance program is that the supplier act unilaterally

34. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Deceptive Price Promotions Price promotion offers Price promotion offers can be viewed as a healthy aspect of price competition which directly or indirectly helps buyers save money. But when such offers are false or misleading, they become an unfair practice that is detrimental to both competition and consumers.