Price Incentives and Discounting Tactics Used in Business | Management

In this article we will discuss about the pricing incentives and discounting tactics used in business.

Pricing involves decisions surrounding offerings, such as discounts, allowances, credit terms, payment periods, and other methods of payment. Types and sizes of discounts for wholesalers, retailers, or other traders vary considerably by industry.

Generally, the discount rate, which reflects the intermediary’s percentage margin on the goods sold, increases as the intermediary’s role in marketing to the customer increases. Thus, discounts are higher in the furniture industry than in the grocery industry.

Typical types of discounts to buyers are as follows :

1. Cash:

A per cent discount if the buyer pays within a shortened period. A typical cash discount might be “2/10, net 30,” indicating that the buyer can subtract 2 per cent from the bill for payment within 10 days or pay the full amount at the end of 30 days from receipt of the invoice.

2. Trade (Functional):

A discount (or payment) offered to channel members for carrying the product, which is often based on the operating expenses of the wholesaler and retailer. For example, a publisher with a list price of Rs. 15 for a book might grant the bookstore and wholesaler trade discounts of 30% and 20%, respectively. The wholesaler’s purchase price would be figured as follows :

3. Quantity:

An incentive given to encourage customers to buy in large volumes. This discount is offered to increase volume of sales.

4. Rebate:

A cash payment offered to the buyer at the end of a designated period that is based on sales volume during that period. This incentive encourages the buyer to increase purchases with a single supplier. Under a typical rebate system, a customer whose purchases total between Rs. 10,000 and Rs. 25,000 may receive a 2% cash rebate; from Rs. 25,000 to Rs. 50,000, the rebate may be 4%; if the purchase is from Rs. 50,000 to Rs. 100,000, the rebate may be 6%; and so on.

5. Seasonal:

A reduction of the basic list price when the demand has declined because of a change in climatic or holiday conditions. Many companies have a policy of offering their customers seasonal discounts during off-season sales periods, with the objective of balancing sales patterns.

6. Credit terms:

Allowing buyers to pay at a later date for goods received today. This is a common practice in negotiating. In such instances, it is important to know when credit can be granted and the extent of the credit limit. Extending credit is one of the most common methods Japanese retailers use to gain a competitive edge.

Pricing tactics and considerations further include the following :

Geographic pricing involves deciding how to price a product to customers in different locations, regions, or countries. Differential pricing among regional markets is a long­standing form of price discrimination. Geographic adjustments involving transactions in the international arena include F.O.B., uniform-delivery, and zone-delivery pricing :

F.O.B. (free on board) is the practice of having the buyer to choose and pay for transportation from the time goods are loaded on a carrier, thus taking ownership at that point.

Uniform-delivery is the practice of quoting a single price to all sellers regardless of location, reached by averaging the transportation charges of all buyers and adding that figure to the selling price.

Zone-delivery is a policy under which sellers divide the country or market into two or more zones, charging the same rate within a zone but different rates among zones. Zone pricing schemes are sometimes adopted.

Promotional pricing may take several forms, such as loss-leader, bait, or special-event pricing. With loss-leader pricing, supermarkets and departmental stores drop the price on well-known brands to stimulate additional store.

Skimming pricing – Sealed-bid pricing

Penetration pricing- By-product pricing

Seasonal discount pricing -Optimal product pricing

Discriminatory pricing -Odd pricing

Oligopolistic pricing -Prestige pricing

Monopolistic pricing -Psychological pricing

Basing-point pricing -Administered pricing Negotiated pricing

Leader Pricing

If the demand for a product is elastic, and if that product has a number of complements either that enhance its value or that can be purchased more conveniently from the same source, that product may then be used as a leader. Leader pricing simply involves setting and then promoting a penetration price on the leader. The expectation is that sales of complements to new customers will increase more than enough to offset the reduced profit on the leader.

Explanatory Note : Complementary products and services are those that experience a sales increase when related products (services) experience a price decrease.

An Example:

As prices are reduced on compact disc players, not only do compact disc player sales grow, but sales of discs (a complement to disc players) grow as well. In such cases, there is a negative cross-elasticity between the products. Compact disc player is a ‘leader’ here.

Analysing the effect that a price change on one product has on the sales of complementary products can often be difficult. However, marketing managers can attempt to take advantage of complementary relationships through either of two special product-line pricing strategies : leader pricing or price bundling.

Table 9 lists the major characteristics that make for a good leader product. It is to be noted that in selecting a leader, marketing managers should avoid products that customers are likely to stock up on during the special prices or where strong substitution effects will lead to simple shifts in sales from high-margin to low-margin products.

Price Bundling

Price bundling is marketing two or more products or services together for a special price. Technically, most firms employ mixed price bundling : Buyers are given the choice of buying two products in a package or buying the products individually. Buyers who place a low value on one of the two products will avoid the bundle. However, the economic incentive of a lower price on one item will lead to additional sales of both products to some buyers who otherwise would buy only one. When complementary relationships are very strong, the effects of the special price are even greater.

Mixed price bundling can be accomplished through either of two approaches. In the mixed leader form, the price of a lead product is discounted on the condition that a second product be purchased. In mixed joint bundling, two or more products or services are offered for a single package price.

Both forms of bundling could be used to achieve the objective of expanding the range of products bought by existing customers.

 

If bundling is to be used to attract new customers, both approaches are feasible. In making a choice between mixed leader and mixed joint bundling, marketing managers should consider the demand-elasticity and complementarity characteristics listed in Table 10.

In general, the characteristics leading to successful mixed leader bundling are similar to the characteristics leading to successful leader pricing policies. However, mixed joint bundling may be used when there is no natural sales-volume leader and when two or more products or services have a mutually reinforcing complementarity.

Illustrative of such situations are : home entertainment packages (combining electronic audio and video products into a total system) or vacation packages (incorporating airline, car rental, and hotel arrangements).