PMPP - Developing a Price Structure

8/8/2019 PMPP - Developing a Price Structure

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1

Pricing Function

PRODUCT MANAGEMENT &PRICING POLICY

Chapter 14:Pricing over the Product Life Cycle

Chapter 15:

Product-Line PricingChapter 16:

Developing a Price Structure


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Chapter 14:Pricing Over the Product Life Cycle

PURPOSE OF THIS CHAPTER :

Review the conceptual Product Life cycle model

Present method for developing pricing strategiesduring different stages of the product life cycle


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Product life cycle

yDevelopment Stage

yIntroduction

yGrowth

yMaturity

ySaturation

yShakeout

yDecline

Sales

trend

Development

Intro

Growth Saturation

Maturity Decline


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Figure 14.1Investment Life Cycle

Cash incomeand

expenditure

CashInvestment

Sales Revenue

Payback point

Direct product

cash cost

Net product cashinflow

Cash recovery of investment

Manufacturing

Marketing

Cumulatif cashinvestment

DEVELOPMENT GROWTH

MATURITY

SATURATION

INTRODUCTION DECLINE

Productdevelopment


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Price elasticity over the product lifecycle

Two broad strategies for pricing new product :

Skimming

Penetration

If the initial price set high because some buyers are not pricesensitive (those who have a relatively high reservation or

maximum price), and if experience factors combine with productquality improvements and increasing competitive pressure fromentering firms to lead to a declining price trend, then we wouldexpect to see increases in price elasticity

Setting relatively high prices

Setting relatively low prices


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Two broad strategies for pricing new product :

Skimming

Penetration

if the initial price is set low to penetrate the market quickly becausebuyers are sensitive to price and there is the possibility of earlycompetitive entries, then the price trend is likely to be increasing over

time.

If the product does provide benefits and value to buyers, then even asthe prices edge upward, we are not likely to see evidence of increasedprice sensitivity, at least until maturity.

Setting relatively high prices

Setting relatively low prices


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y Difficult to make unequivocal statements about how priceelasticity may change over the stages of the product life cycle

y Depends on how the products is initially priced;

y Whether the products price follows a decreasing orincreasing trend over time ;

y The degree to which sellers make quality improvements overtime;

y Degree that buyers perceive real benefits and therefore valuein-use in the product.


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y Managers must not assume that price elasticity isconstant over product, markets, or time.

y If price elasticity is likely to decline for a new product

category, then price reductions aimed at increasing overalldemand will have their strongest effect early in the productlife.

y

If price elasticity increases over the lifecycle, then pricereductions to increase demand will have less effect early butan increasing effect as the product mature


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Table 14.1 Basic pricing decisions

yWhat to charge for the different products and services produced bythe firm

yWhat to charge different types of customers

yWhether to charge different types of distributors the same price

yWhether to give discounts for cash and how quickly payment shouldbe required to earn them

yWhether to suggest resale price or only set the price charged onesown customers

yWhether to price all items in the products line as if they were separateor to price them as team

yHow many different price offerings of each item to have

yWhether to base prices on the geographical location of buyers

yFor establish products, whether to change prices


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Factor to Consider WhenPricing New Products

yDemand consideration provide a ceiling or maximumprice

y The determination of maximum price depends onthe customers perception of value in the selleroffering.

yCost, provide a floor or minimum possible price

y for a new product, the relevant costs are the futureexpected direct costs over the products life cycle

y


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Relevant Cost

Sales Revenue

Direct product cash

cost (relevant cost)

Net product cashinflow

DEVELOPMENT GROWTH

MATURITY

SATURATION

INTRODUCTION DECLINE


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Factor to Consider WhenPricing New Products

yA product that is new to the world passes through distinctivecompetitive stages in its life cycle.

y As new competitors enter the field and innovationsnarrow the gap of distinctiveness between the product and itssubstitutes, pricing discretion narrows.

yWhat the product is worth to the buyer, not what it cost to theseller, is the controlling consideration.

y it is important to analyzing the relationship between thebuyers perceived benefits and the total acquisition cost.


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Estimating demand for a New Product

Will the product fill a need or want and, therefore, will sell ifthe price is right?

At what range of prices will the product be acceptable topotential buyers?

What is the expected sales volumes at feasible price pointsin the acceptable price range?

What is the extent of potential competitive response?


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Buyers Analysis

ySelecting Probable Prices

yBuyers Alternatives-An analysis of demand can be made:

1.Determine the major uses for the product, and then the productsperformance characteristics for these uses

2.Specify the products that are the buyers best alternatives 3. For each use, determine how well the products performance

characteristics meet the requirements of customers compared toalternative products

4. Forecast prices of alternative products

5. Estimate the superiority premium

6. Determine a parity price for the product relative to the buyers bestalternative

(Parity is a price that encompasses the premium a customer would be willing to payfor comparative superiority)


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New-product Pricing

yPricing the Superiority Differential- Determinethe price premium that the new products superiority

will most profitably warrant

Depends on uncertainties for buyer, future costs,and the dynamic demand schedule

yEstimating Costs- A value-oriented approach topricing begins with determining what the target

market would be willing to pay, and then design aproduct using this target cost


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Whose Cost?

yBuyers costs- can be determined by applying value analysistechniques and performance of alternative products to findthe superiority premium

yCompetitors costs- can be determined for products in the market by estimating:Their staying powerThe floor of retaliation pricing

can be determined for unborn competitive products by:Forecasting the relationship between unit direct costs and

cumulative experience

ySellers costs- 1. A new product must be pre-priced in the R&D stage and then

periodically as it progresses toward market

2. Establish a price floor

3. Estimate total costs with and without the new product


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yEstimating the Price-Volume-ProfitRelationship- allows the manager to trace theimplications of different introductory pricing strategies

New-product Pricing


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y 1. Demand is likely to be inelastic during introduction

y 2. Market can be separated into distinct pricesegments

y 3. Skimming is safer when elasticity is unknown (it iseasier to reduce price)

y 4. Cash is needed to fund expansion (caution:sufficient volume must be obtained)

y 5.A capacity constraint exists

y 6. There is realistic perceived value in product

y 7.A high introductory price provides room for futureprice decreases

y 8.A hi h introductor rice ma be used to si nal

When To Use A Skimming Price Strategy


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When To Use A Penetration Price Strategy

y 1. Demand is likely to be elastic during introductiony 2. Product quality and benefits can be easily determined

after trial and usey 3. Possible economies of scale through accumulated

volumey 4. Product faces strong potential competition soon after

introductiony 5. There is no segment of buyers willing to pay a higher

pricey 6. There is high available capacity in production and

distributiony 7.A low introductory price may be used to signal large

experience effects on costs


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Skimming vs. Penetration

y The speed with which a new product losesits uniqueness and sinks to the level of justanother competitive product depends on:

1. Its total sales potential2. The investment required for rivals to manufacture

and distribute the product

3. The strength of the patent and know-how

protection4. The alertness and power of competitors


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(Summary)Guidelines For Pricing New Products

y 1. Clearly define corporate goals

y 2. Begin pricing during development stage

y 3. Use process of successive approximations

(Rough estimates of relevant concepts are preferable to precise knowledge ofhistorical irrelevancies.)

y

4. Cost information about the seller, buyers and sellers rivals can provide usefulguidance

y 5. The only relevant costs are the incremental costs of going ahead; Costs of R&D andmarket testing are irrelevant

y 6. Consider the changing economic and competitive environment of the productthroughout its life cycle.

y 7. Price the product through the eyes of customers. Price it just low enough to make it

irresistible relative to buyers alternatives.y 8. Buyers cost savings (or revenues gained) as a rate of return on their investment is

key to predicting price sensitivity for business customers.

y 9. Choosing between skimming and penetration should be based on a careful analysisof the market.


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Pricing During Growth

yObjective is to select a price that will helpgenerate a sales volume that enables the firmto realize its target contribution 3 essential points for pricing during growth:

1. Range of feasible prices has narrowed

2. Unit variable costs have decreased due toexperience factor

3. Fixed expenses have increased due to increased

capitalization and period marketing costs


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Pricing During Growth

yResponding to Lower-Priced CompetitiveOfferings- The firm should introduce a lower-priced

version of the product before competitors enter

yProlonging the Growth Stage- The firm canrevitalize the product with new and improved

versions

yPricing Next Generation Products


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y

y Pricing objective is to choose the price

alternative leading to maximum contributionFollow competitions reduced prices

Try to reduce costs by using cheaper materials, eliminating severallabor operations, or reducing period marketing costs

PricingDuring Maturity


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Pricing ADeclining Product

y

y Pricing objective is to maximize

contributions per sales dollar generated Most firms eliminate all period marketing costs and remain in the

market as long as price exceeds direct variable costs


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Dynamic Pricing Models

yDiffusion effectrefers to the increased likelihood ofpurchase as market penetration increases

ySaturation effectrefers to the reduction in theunfulfilled demand as market penetration increases


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Focused Price Reductions

Base product vs. option pricesBase product vs. option pricesv Many customers will make their purchase decision using the base

price alone, and then become less price sensitive to additionaloptions or accessories that can be purchased separately

Channel specific pricingChannel specific pricingv Offer lower prices on high-quality products by identifying

distribution channels that serve price sensitive customers andoffering the lower prices through these channels only

Pricing according to customers perceivedPricing according to customers perceived

valuesvaluesv Offering similar services to customers at different prices shifts

demand and enhances volume from price sensitive segments


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Focused Price Reductions

Price bundlingPrice bundlingv Offering two or more products or services at a price that usually is

lower than the sum of the individual prices

Product redesignProduct redesignv Unbundling the base product from the options by changing it in

some way(fewer features, lower grade material, different brandname) and then selling it as a separate, lower-priced product

v The objective is to appeal to price sensitive customers who wouldnormally not buy the original product at its regular price


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Product-line PricingProduct-line Pricing

Chapter 15Chapter 15


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Types of Pricing DecisionsTypes of Pricing Decisions

Determining the lowest priced product and its

price (lowlow--end productend product)

Determining the highest price product and itsprice (highhigh--end productend product)

Setting the price differentials for allintermediate products

Determining the lowest priced product and its

price (lowlow--end productend product)

Determining the highest price product and itsprice (highhigh--end productend product)

Setting the price differentials for allintermediate products


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Conceptual FrameworkConceptual Framework

Demand interrelationships

Complementarity

Substitute relationships Cost interrelationships

Common resources

Common support structure

Nature of marketing strategy

Segmentation issues

Demand interrelationships

Complementarity

Substitute relationships Cost interrelationships

Common resources

Common support structure

Nature of marketing strategy

Segmentation issues


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Determining Price

Differentials

Determining Price

Differentials1. Rank products in ascending order of expected prices, i.e., from low tohigh price.

2. Determine the lowlow--end price,end price, PPminmin..

3. Determine the highhigh--end price,end price, PPmaxmax..

4. The price of thejjth ordered productth ordered product is

5. The problem is to determine kk:

where nn is the number of products in the line

1. Rank products in ascending order of expected prices, i.e., from low tohigh price.

2. Determine the lowlow--end price,end price, PPminmin..

3. Determine the highhigh--end price,end price, PPmaxmax..

4. The price of thejjth ordered productth ordered product is

5. The problem is to determine kk:

where nn is the number of products in the line


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ExampleExample

PminPmin= $25; PmaxPmax= $150; nn = 6


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ExampleExample

PA =$25

PB

= $25(1.431) = $ 35.78 ($ 36)

PC = $35.78(1.431) = $ 51.19 ($ 55)

PD = $51.19(1.431) = $ 73.25 ($ 79)

PE = $73.25(1.431) = $104.82 ($109)

PF = $150

PA =$25

PB

= $25(1.431) = $ 35.78 ($ 36)

PC = $35.78(1.431) = $ 51.19 ($ 55)

PD = $51.19(1.431) = $ 73.25 ($ 79)

PE = $73.25(1.431) = $104.82 ($109)

PF = $150


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GuidelinesGuidelines Segmented pricing strategySegmented pricing strategy:

Noticeable differences should be equivalent to perceived valuedifferences.

Highest and lowest prices in line have a special complementaryrelationship to other offerings priced to encourage desired buyer

perceptions.

Price differentials should get wider as price increases over product line.

TradingTrading--up pricing strategyup pricing strategy:

Decide which products are to be designed and priced similar to eachother.

Higher-priced product should have a feature or observable benefitperceived to be of value, but the incremental price is less than itsperceived value (a smaller price differential).

Segmented pricing strategySegmented pricing strategy:

Noticeable differences should be equivalent to perceived valuedifferences.

Highest and lowest prices in line have a special complementaryrelationship to other offerings priced to encourage desired buyer

perceptions.

Price differentials should get wider as price increases over product line.

TradingTrading--up pricing strategyup pricing strategy:

Decide which products are to be designed and priced similar to eachother.

Higher-priced product should have a feature or observable benefitperceived to be of value, but the incremental price is less than itsperceived value (a smaller price differential).


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Price BundlingPrice Bundling

Price bundling is the tactic of marketing two or moreproducts and/or services for a price below the sum of theindividual prices

It creates an incentive for purchasers of one product toalso buy other(s).

Examples:

Weekend hotel packages

Vacation packages

Cable TV plans

Season ticket plans

Price bundling is the tactic of marketing two or moreproducts and/or services for a price below the sum of theindividual prices

It creates an incentive for purchasers of one product toalso buy other(s).

Examples:

Weekend hotel packages

Vacation packages

Cable TV plans

Season ticket plans


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Developing A Price BundlingS

trategy

Developing A Price BundlingS

trategyFour basic steps

1. Define customer segment targets

2. Determine bundling objectives

3. Determine demand conditions for each

objective 4. Determine profitability of alternative

strategies

Four basic steps

1. Define customer segment targets

2. Determine bundling objectives

3. Determine demand conditions for each

objective 4. Determine profitability of alternative

strategies


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Selecting Products To

Bundle

Selecting Products To

Bundle

1. Select products that have relatively lowunbundled sales volume.

2. Select products that will generate newcustomers.

3. Mixed-leader bundling - the leader (A)

should be both the lower margin product andthe higher volume product. The increase involume of (B) will contribute more to profitsthan the loss in contributions in (A).

4.Mixed-joint bundling - both contribution margins and

unbundled volumes should be about equal.

5. Products should be functionally related to each other and ofequivalent quality.

Buyers evaluate the lead product first.

Then adjust evaluations based on assessment of other items in the bundle.

1. Select products that have relatively lowunbundled sales volume.

2. Select products that will generate newcustomers.

3. Mixed-leader bundling - the leader (A)

should be both the lower margin product andthe higher volume product. The increase involume of (B) will contribute more to profitsthan the loss in contributions in (A).

4.Mixed-joint bundling - both contribution margins and

unbundled volumes should be about equal.

5. Products should be functionally related to each other and ofequivalent quality.

Buyers evaluate the lead product first.

Then adjust evaluations based on assessment of other items in the bundle.


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Price Bundling DecisionsPrice Bundling Decisions

Pure bundle ormixed bundle?Pure bundle ormixed bundle?

Mixed bundles generally more profitable unless bundle purchase is normal orlogical (e.g., Car options; Furniture suites).

Magnitude of price discounts?Magnitude of price discounts? Sufficient to enhance transaction value (20% or more).

For mixed joint bundles, provide some discount on individual items and additionaldiscounts for the bundle (provides greater perceived transaction value).

Pure bundle ormixed bundle?Pure bundle ormixed bundle?

Mixed bundles generally more profitable unless bundle purchase is normal orlogical (e.g., Car options; Furniture suites).

Magnitude of price discounts?Magnitude of price discounts? Sufficient to enhance transaction value (20% or more).

For mixed joint bundles, provide some discount on individual items and additionaldiscounts for the bundle (provides greater perceived transaction value).


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Price Bundling DecisionsPrice Bundling Decisions

Choice and number of bundle itemsChoice and number of bundle itemsSince this is a tactic to enhance sales of low-volume products, do not bundle high-volume,

profitable products.

Items should be functionally related (benefits of use provide synergy to buyer/user).

Mixed leader product should be higher sales volume and lower margin product. Mixed jointproducts should be equivalent in sales volume and margin.

Items should have equivalent perceptions of quality (do not load poor quality items with higherquality items).

Bundles generally should not be larger than five items.

Presentingthe price bundlePresentingthe price bundleThe purchase requirements to qualify for the bundle price must be as transparent as the

bundle price.

This requirement is necessary to prevent customers from forming reference prices that arenot much lower than the bundle price.

Otherwise, confusion, anger and perceptions of unfairness may occur.

Choice and number of bundle itemsChoice and number of bundle itemsSince this is a tactic to enhance sales of low-volume products, do not bundle high-volume,

profitable products.

Items should be functionally related (benefits of use provide synergy to buyer/user).

Mixed leader product should be higher sales volume and lower margin product. Mixed jointproducts should be equivalent in sales volume and margin.

Items should have equivalent perceptions of quality (do not load poor quality items with higherquality items).

Bundles generally should not be larger than five items.

Presentingthe price bundlePresentingthe price bundleThe purchase requirements to qualify for the bundle price must be as transparent as the

bundle price.

This requirement is necessary to prevent customers from forming reference prices that arenot much lower than the bundle price.

Otherwise, confusion, anger and perceptions of unfairness may occur.


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Perishable-asset Revenue

Management

Perishable-asset Revenue

Management Generalizing from the airlines, we can call this management activity one of maximizing

revenues with perishable assets.

Managing perishable assets via price segmentation can be applied outside the airlines.

Lodging and travel

Spectator events (e.g., theater, sports)

Electric Utilities

Services (e.g., photo studio, hair salon, auto repair)

Shipping

High technology products

Broadcast advertising

Banks, savings and loans

Telephone companies

Retail markdowns and scheduling sales

Generalizing from the airlines, we can call this management activity one of maximizingrevenues with perishable assets.

Managing perishable assets via price segmentation can be applied outside the airlines.

Lodging and travel

Spectator events (e.g., theater, sports)

Electric Utilities

Services (e.g., photo studio, hair salon, auto repair)

Shipping

High technology products

Broadcast advertising

Banks, savings and loans

Telephone companies

Retail markdowns and scheduling sales


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The General ProblemThe General Problem

For a particular selling occasion, the seller has a fixed number of units (capacity) to sell by acertain date in the future,

If the units are not sold during this selling occasion, they cannot be sold at any price later.

Two price segments situation:

- Some buyers have a higher acceptable price than others.

- The total number of actual buyers with the high maximum acceptable price will be less thanavailable capacity.

If a single high price is set, then some unknown portion of units will be sold:

Where Is the number of units that could be sold to low-price buyers.

If units are sold at , a discounted price, revenues would increase.

For a particular selling occasion, the seller has a fixed number of units (capacity) to sell by acertain date in the future,

If the units are not sold during this selling occasion, they cannot be sold at any price later.

Two price segments situation:

- Some buyers have a higher acceptable price than others.

- The total number of actual buyers with the high maximum acceptable price will be less thanavailable capacity.

If a single high price is set, then some unknown portion of units will be sold:

Where Is the number of units that could be sold to low-price buyers.

If units are sold at , a discounted price, revenues would increase.


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The Decision ProblemsThe Decision Problems

Choose qlow, the number of units to offer at a discount.

Choose the discount price,plow

Choose the full price,phigh

To maximize revenues for the selling occasion.

Given the nature of demand that occurs for the discounted units,the seller must decide when, and whether to stop selling thediscounted units, and only offer the high price units for theremainder of the selling period.

Examples:Examples:

Electric utility selling power under contract.

Hotel setting aside number of rooms for convention.

Airline determining number of non-refundable discounted seats.

Choose qlow, the number of units to offer at a discount.

Choose the discount price,plow

Choose the full price,phigh

To maximize revenues for the selling occasion.

Given the nature of demand that occurs for the discounted units,the seller must decide when, and whether to stop selling thediscounted units, and only offer the high price units for theremainder of the selling period.

Examples:Examples:

Electric utility selling power under contract.

Hotel setting aside number of rooms for convention.

Airline determining number of non-refundable discounted seats.


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Decision CriterionDecision Criterion

Maximize contributions per sellingoccasionMaximize contributions per sellingoccasion

Operating cost structure: relatively high fixedcosts to total costs.

As long as plowis greater than unit directvariable costs, revenues will be greater than ifonly (qcap qlow) units are sold atphigh.

Maximize contributions per sellingoccasionMaximize contributions per sellingoccasion

Operating cost structure: relatively high fixedcosts to total costs.

As long as plowis greater than unit directvariable costs, revenues will be greater than ifonly (qcap qlow) units are sold atphigh.


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Total RevenuesTotal Revenues

Where X = the number of units sold at fullprice

Where X = the number of units sold at fullprice


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ImplicationsImplications

If one more unit is added to qlow , additional

revenue of plow will occur.

If there is sufficient capacity to meet demandXat phigh, no other effects occur.

If (qlow+X) exceeds capacity, revenue is lessthan optimal by (phigh-plow).

If one more unit is added to qlow , additional

revenue of plow will occur.

If there is sufficient capacity to meet demandXat phigh, no other effects occur.

If (qlow+X) exceeds capacity, revenue is lessthan optimal by (phigh-plow).


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Conditions for Using Yield ManagementConditions for Using Yield Management

Enabling Condition Requirement

Fixed capacity Capacity change costs are high

Perishable inventory Products/services cannot be sold after selling occasion

Fluctuating demand Sometimes stockouts & sometimes unused capacity

Fixed costs High ratio of fixed costs to total costs

Segmentable markets Price sensitive customers can be identified and separated

Arbitrage preventableCustomers who buy at low price cannot resell to less

price-sensitive customers

Early purchase feasibleCustomers are willing and able to purchase in advance of

use

Historical sales dataExisting IT facilitates developing data base to monitor

sales response to price and marketing

Accurate sales forecastSegment by segment demand forecasts facilitate

selective discounting to improve revenues

Information systems Need sophisticated systems to utilize yield management


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Benefits of Yield

Management

Benefits of Yield

Management Continuous monitoring of demand.

Facilitates use of proactive dynamic pricing. Focused price reductions offer leverage for

increasing profits.

Focusing on revenue management shiftsperformance measures from averages tocontributions per unit of resource.

Continuous monitoring of demand.

Facilitates use of proactive dynamic pricing. Focused price reductions offer leverage for

increasing profits.

Focusing on revenue management shiftsperformance measures from averages tocontributions per unit of resource.


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Developing a PriceStructure

Chapter 16


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Sales made in different quantities

Sales made to different types of distributors

Sales made to distributors who perform differentfunctions

Sales made to buyers in different geographicallocations

Sales made with different credit and collectionconditions

Sales made at different times of day, month, season,or year

Managing base/list prices

Pricing Management deals with organizingthe organizational unit responsible for pricing,

establishing, and implementing the tactics to useschedules

when adjusting prices or determining pricesthat establish price differentials

for sales made under different conditions, such as :


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The actual amount of revenues received for the same

product or service varies over time for the samecustomers and, of course, across customers.

Differences in customer profitability can occur eitherbecause of these variations in revenues received fromcustomers, or because of the differences in the cost to

serve this customers.

Every discount, rebate, or allowance result in areduction in revenues

Managing

Transactions

List/base price that is communicated inprice lists, advertisements, catalogs,websites, and other publicly available

outlets provides customers andcompetitors with the firms value

statement


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1. The time and conditions of payment

2. The nature of discounts

3. Where and when buyers will take title

4. Who pays for the transportation of thegoods and how these charges aredetermined

Price StructurePrice structures provide the

foundation for prices bydetermining :

Price structures decisions define how differentialcharacteristics of the product or service will be

priced


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Complex price structures provides flexibility

because they allow for price variations based onvariations in :

product/service attributes

customer characteristics

customer behavior

changing competitive conditions

Offering different product/services in the productline with different features or benefit at differentprices gives sellers the opportunity to develop

prices for buyers who have different degrees ofsensitivity to price levels and price differences


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Complex price structures can becomeinconsistent and incomprehensible tocustomers

Clear and consistent price signals can reducethe likelihood of price wars

This will also provide important qualityinformation to uncertain buyers

When buyers understand how prices they payare determined, they are more likely toperceive pricing procedures as fair and thusaccept the prices


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This illustrates the difficulitiesof making a price structure or

schedule too complex


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The decision makers mustdetermine how prices should varyacross customers, products,

territories, and purchaseoccasions to meet corporateobjectives

This will requires identifying

the key factors thatdifferentiate price-market

segments


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Often it is difficult to fully identify the variousfunction the distributors perform and therefore todetermine a trade and functional discountstructure that reflects the service performed

The justification for trade and functional discounts isthat different distributors perform different functions

within the distribution channel and should becompensated accordingly

Some distributors combine the functionsof wholesalers and retailers


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PromotionalPromotional- given to distributors as an

allowance for the distributors efforts topromote the manufacturers product throughlocal advertising, special displays, or otherpromotions

Discounts

TradeTrade- based on a distributors place in the distributivesequence

FunctionalFunctional- represent payment for performance of certainmarketing functions that would otherwise be performed by the

manufacturer


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Discounts

PeakPeak--load pricingload pricing- higher prices during periods ofhigher demand, and lower prices during off-peak periods

CashCash- reward for the payment of an invoice or anaccount within a specified period of time

AdvanceAdvance--purchasepurchase- lower prices for earlypurchases

QuantityQuantity- granted for volume purchases


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Quantity Discounts

this is granted for volume purchases (Rp or

Units), either in a :

single purchase (noncumulative), or

a specified period of time (cumulative,deferred, or patronage discount)


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Noncumulative

Quantity Discounts

serve to encourage large orders

fewer orders over a given period of time period

example : printing company


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10 ladders @ $30 $ 300


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Applying Discounts:The Order

10 ladders @ $30 $ 300

6 ladders @ $50 300

10 ladders @ $90 900

5 ladders @ $120 600

4 ladders @ $150 600

Total $ 2,700


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Applying QuantityDiscount

Totalorder

amount

$ 2,700

Discount, $2,700 x 0.05 135

Netorderamount $ 2,565


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ApplyingTrade Discounts

Netorderamount $ 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

Amountduemanufacturer $ 1,315.84


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ApplyingCash Discount

Amountduemanufacturer $ 1,315.84

Less:3 % discount 39.48

Net Remittance $ 1,276.36


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Nonlinear Pricing

refers to situation when a pricestructure leads to a decline in per-unit

price as volume sold (ordered)increases


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ypes o r ce scoun


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Types of Discount

StructuresPricing Decisions Number of Decisions

Fixed (uniform) price Price 1

All units quantity discountPrice 2 or more

Break Points 1 or more

Two-part PricesFixed Price 1

Variable Price 1

Two-block PricesFixed Prices 2 or more

Variable Prices 2 or more

Price Points Prices 2 or more

Multiperson Pricing Prices 2 or more

Structures


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ypes o r ce scoun


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Types of Discount






Variable Price 1





Structures

Total


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uniform two-part pricing

Unit Price

TR

Quantity

TotalRevenue

ypes o r ce scoun

S


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Types of Discount






Variable Price 1


Variable Prices 2 or morePrice Points Prices 2 or more


Structures

Total


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two block prices

Unit Price

TR

Quantity

TotalRevenue

ypes o r ce scoun

St t


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Types of Discount






Variable Price 1





Structures

Total


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price points

Quantity

TotalRevenue

Unit Price

TR 1

TR 2

Fixed


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A Simple

Quantity Discount Model

The change in buyers inventory costs as quantity

purchased increases and changes in the sellerscosts as the purchase order size increases

Buyers cost function is given byBuyers cost function is given byTEKB = (Ad)/q + (qki)/2

Sellers cost function is given bySellers cost function is given byTEKS = (Ad)/q - (pkiq)/2


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Some Additional

Managerial Issues As prices are increased, more buyers qualify for a

discount

When buyers merge, the seller may give away

more discounts

As industrial buyers use the internet to track and

use different discount schedules, they can

selectively vary volume purchases across

venders

Buyers will find it profitable to buy in large

volumes and then ship the goods to other

markets for resale


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Pricing Special Orders

A special orderspecial orderis an order placed by anestablished customer for a quantity different fromthe normal one, a one-time-only customer for asubstantial quantity placed by a non-regular

customer, or an order placed for a product notusually produced by the firm but which the firmhas the capacity to produce

Use of the CPRU when establishing prices provides

a means of maintaining consistency overcustomers, product lines, or special orders


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Cash Discounts

and Credit Decisions The seller must determine :The seller must determine :

The amount of the cash discount

The length of the credit period

The amount to spend on attempting to collect overdueaccounts

The customers to whom to offer credit terms

The magnitude of the line of credit

Increasing the amount of the cash discount orlengthening the time period that the discount applies willresult in increases in demand


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Geographical PricingDecisions

F.O.B. origin pricingF.O.B. origin pricing means the seller quotesprices from the point of shipment

FFreeree OOnn BBoardoard means it is the buyersresponsibility to select the mode of

transportation, choose the specific carrier,

handle any damage claims, and pay all shippingcharges


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Geographical PricingDecisions

Delivered pricingDelivered pricing means the price quoted by themanufacturer includes both the list price and

transportation costsSingle-zone pricing- the seller receives a

different net return when transportationcosts for customers vary

Multiple-zone pricingdelivered pricesare uniform within two or more zones


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Using Price Structure

to Gain CompetitiveAdvantage

By using distance between seller and buyer and byunderstanding the buyers relative costs of carryinginventory and costs of capital, a price structure canbe developed that uses differential prices to reflectdifferential buyers, markets, and product or servicecharacteristics

When a price structure is kept simple, it is relativelymore difficult to take advantage of differential

characteristics that may lead to a competitiveadvantage, or it is more difficult to diminish or remove acompetitive disadvantage


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Wassalam

Documents

PMPP - Developing a Price Structure