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Chapter 16
Developing A Price Structure
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.
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
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
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
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.
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
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
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.
Peak Load Pricing
• Higher prices during periods of higher
demand, and lower prices during offpeak periods
• Usually in Electric or
Telecommunication sectors
– Time of day pricing
Quantity Discounts
• Most common type of discount
• This discount is granted for Volume
purchases (measured in dollars or units)
Example: Applying Discounts:
10 ladders @ $30
6 ladders @ $50
10 ladders @ $90
5 ladders @ $120
4 ladders @ $150
Total
$
300
300
900
600
600
$ 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
Applying Quantity Discount
Total order amount
Discount, $2,700 x 0.05
Net order amount
$ 2,700
135
$ 2,565
Applying Trade Discounts
Net order amount
$ 2,565.00
Less: 40% discount
Less: 5% discount
1,026.00
$ 1,539.00
153.90
$ 1,385.10
69.26
Amount due manufacturer
$ 1,315.84
Less: 10% discount
Applying Cash Discount
Amount due manufacturer
Less:3 % discount
Net Remittance
$ 1,315.84
39.48
$ 1,276.36
Price Discount Structures
Types of
Discount
Structures
Pricing
Decisions
Number of
Decisions
Fixed (uniform) price
Price
1
All units quantity
discount
Two-part prices
Price points
Price
Break points
Fixed price
Variable price
Fixed prices
Variable prices
Prices
2
1
1
1
2
2
2
Multi-person pricing
Prices
2 or more
Two-block prices
or more
or more
or more
or more
or more
Fixed (Uniform) Price
Total
Revenue
TR
Unit Price
Quantity
Quantity Discount (All Units)
Total
Revenue
TR
Unit Price
Quantity
Uniform Two-Part Prices
Total
Revenue
Fixed
TR
Unit Price
Quantity
Two-Block Prices
Total
Revenue
TR
Unit Price
Quantity
2 Two-Part Prices
Total
Revenue
TR1
TR2
Fixed
Unit Price
Quantity
Price Points
Total
Revenue
•
•
•
•
• TR
• Unit Price
Quantity
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
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
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
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
Geographical Pricing
Decisions
• Delivered 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
Geographical Pricing Decisions
• F.O.B. with freight allowed- the buyer arranges and
pays for the transportation but deducts these
transportation costs from the invoice total and remits the
net amount
• Basing-point pricing- the delivered price is the
product’s list price plus transportation costs from a
basing point to the buyer
Home Assignment
• What are the advantages and
disadvantages of Company wide basing
point
• Answer Question 8,9 of Page 468
END OF CHAPTER