1. Developing A Price Structure
Chapter 9
Developing A Price Structure

2. 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.

3. 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

4. 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

5. Discounts
Trade- based on a distributor’s place in the distributive sequence
Functional- represent payment for performance of certain marketing functions that would otherwise be performed by the manufacturer

6. 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.

7. Promotional 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

8. 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

9. 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.

10. 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

11. Quantity Discounts Most common type of discount
This discount is granted for Volume purchases (measured in dollars or units)

12. Example: Applying Discounts:
10 $30 $
6 $50
300
10 $90
900
5 $120
600
4 $150
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

13. Applying Quantity Discount
Total order amount
$ 2,700
Discount, $2,700 x 0.05
135
Net order amount
$ 2,565

14. 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
$ 1,315.84

15. Applying Cash Discount
Amount due manufacturer
$ 1,315.84
Less:3 % discount
39.48
Net Remittance
$ 1,276.36

16. Price Discount Structures

17. Fixed (Uniform) Price
Total Revenue TR
Unit Price
Quantity

18. Quantity Discount (All Units)
Total Revenue TR
Unit Price
Quantity

19. Uniform Two-Part Prices
Total Revenue TR
Fixed
Unit Price
Quantity

20. Two-Block Prices
Total Revenue TR
Unit Price
Quantity

21. 2 Two-Part Prices
Total Revenue
TR1
TR2
Fixed
Unit Price
Quantity

22. Price Points
Total Revenue • • TR • • • •
Unit Price
Quantity

23. Cash Discounts and Credit Decisions
The seller must determine
The amount of the cash discount
The length of the credit period
The amount to spend on attempting to collect overdue accounts
The customers to whom to offer credit terms
The magnitude of the line of credit
Increasing the amount of the cash discount or lengthening the time period that the discount applies will result in increases in demand

24. Reasons for Cash Discounts
To encourage prompt payment of invoices
To reduce credit risks and the cost of collecting overdue accounts
To follow industry or historical practice

25. Problems of Cash Discounts
It may be more economical for a firm to borrow money on a short-term basis than to offer cash discounts
Large buyers may take the cash discount as a matter of routine, even though the payment is not made within the discount period
During period of inflation, many firms experience a slow-down in the payment of bills by customers

26. Geographical Pricing Decisions
F.O.B. origin pricing means the seller quotes prices from the point of shipment
Free 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

27. Geographical Pricing Decisions
Delivered pricing means the price quoted by the manufacturer includes both the list price and transportation costs

28. Geographical Pricing Decisions
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

29. Geographical Pricing Decisions
Freight-absorption pricing - The seller absorbs all or part of the cost of transportation.
This amounts to a price discount, and is used as a promotional tactic.
Basing-point pricing- the delivered price is the product’s list price plus transportation costs from a basing point to the buyer
The basing point is a city where the product is produced, but the product may actually be shipped from a warehouse or factory in a city other than where the product is produced

30. Basing-Point Pricing System
Product Price = $100
Basing-Point Pricing System
Base
Mill X
$20
Actual Freight
Customer
pays
$120
$30
Actual Freight
Mill Y
$10
Actual Freight
Mill Z
$10 Freight Absorption
$10 Phantom Freight
Adopted from: Monroe (1990), Pricing: Making Profitable Decisions, 2 ed.,
New York: McGraw-Hill Publishing Company.

31. Home Assignment
What are the advantages and disadvantages of Company wide basing point
Answer Question 8,9 of Page 468
END OF CHAPTER