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Pricing Tactics
Pricing strategies set the base level of prices, the general price level at which company expects to sell the products or services. The general price levels would be in terms of price skimming, penetrating pricing or neutral pricing.
1. Geographic pricing
Many companies ship their products to nationwide and worldwide markets. Companies may use different geographic pricing tactics to moderate the impact of freight costs on distant customers. The following methods of geographic pricing are commonly used:
(i) FOB origin pricing: free on board origin pricing is a price tactic that requires the buyer to absorb the freight costs from the point of shipping (origin). Because transportation costs generally increase with the increase with the increase distance the merchandise is shipped, hence customers located farthest away will pay the highest prices.
(ii) Uniform delivered pricing: if the company wants to equalize the costs for all customers, the firm will adopt uniform delivered pricing. The company pays the actual freight changes and bills every purchaser an identical flat freight charge.
(iii) Freight absorption pricing: the company pays all or part of the actual freight charges and does not pass them onto the buyer. Companies may use this tactic in intensely competitive markets or as a way to break into new markets.
2. Discounts, allowances and rebates
A base price can be lowered through the use of discounts and related tactics of allowances, rebates and zero-percent financing. Companies use various forms of discounts to change buying patterns of customers, such as buying during off season, cash instead of credit and buying larger quantities. The following are the most common tactics:
(i) Quantity discounts: when buyers get lower prices for buying multiple units or larger quantities. Quantity discounts may be cumulative or noncumulative. Cumulative discounts are total deductions made from the customers’ total purchases in a specified time period and are intended to encourage customer loyalty. Noncumulative discounts are discounts that apply to single orders to purchase rather than to the total volume and are intended to encourage purchases in larger quantities.
(ii) Cash discounts as the name suggests is a discount offered to the customer or channel intermediary in return for prompt for goods and services. Prompt payment reduces interest costs and bad debts for the company.
(iii) Trade discounts are given to channel intermediaries in return for certain special functions performed.
(iv) Rebate is a cash refund given by the purchase of a product during a specific period. The advantage of a rebate is that it is temporary inducement, and does not alter the base price structures. Discounts become very difficult to withdraw sometimes as the company may face stiff resistance from the buyers.
(v) Zero percent financing: is very commonly used for high priced items like consumer durables and serves to stimulate demand.
3. Special pricing tactics
Special pricing tactics are unique and defy categorization. Managers may use these tactics for various reasons; stimulate demand for specific SKU’s increase store patronage and offer wider variety at a specific price point.
(i) Price lining: when a company establishes prices for different products in its product lines it establishes a price line. Price lining is the practice of offering a product line within its product line. The company may establish four price points for the entire line; say $ 500, $ 750, $ 950 and $ 1250. The company would then price the 40 different varieties of shirts at these four specific price points. This tactic is very commonly used for products line like apparel, shoes, cosmetics, watches, where there is a large variety within the product line.
(ii) Cross benefit pricing is when prices are adjusted across various models of a particular category, such that the margin losses on a specific model are subsidized by a different model. This is similar to loss leader pricing and the aim is gain acceptance for a basic model or set competitive prices for a model that faces greater competition.
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1. Geographic pricing
Many companies ship their products to nationwide and worldwide markets. Companies may use different geographic pricing tactics to moderate the impact of freight costs on distant customers. The following methods of geographic pricing are commonly used:
(i) FOB origin pricing: free on board origin pricing is a price tactic that requires the buyer to absorb the freight costs from the point of shipping (origin). Because transportation costs generally increase with the increase with the increase distance the merchandise is shipped, hence customers located farthest away will pay the highest prices.
(ii) Uniform delivered pricing: if the company wants to equalize the costs for all customers, the firm will adopt uniform delivered pricing. The company pays the actual freight changes and bills every purchaser an identical flat freight charge.
(iii) Freight absorption pricing: the company pays all or part of the actual freight charges and does not pass them onto the buyer. Companies may use this tactic in intensely competitive markets or as a way to break into new markets.
2. Discounts, allowances and rebates
A base price can be lowered through the use of discounts and related tactics of allowances, rebates and zero-percent financing. Companies use various forms of discounts to change buying patterns of customers, such as buying during off season, cash instead of credit and buying larger quantities. The following are the most common tactics:
(i) Quantity discounts: when buyers get lower prices for buying multiple units or larger quantities. Quantity discounts may be cumulative or noncumulative. Cumulative discounts are total deductions made from the customers’ total purchases in a specified time period and are intended to encourage customer loyalty. Noncumulative discounts are discounts that apply to single orders to purchase rather than to the total volume and are intended to encourage purchases in larger quantities.
(ii) Cash discounts as the name suggests is a discount offered to the customer or channel intermediary in return for prompt for goods and services. Prompt payment reduces interest costs and bad debts for the company.
(iii) Trade discounts are given to channel intermediaries in return for certain special functions performed.
(iv) Rebate is a cash refund given by the purchase of a product during a specific period. The advantage of a rebate is that it is temporary inducement, and does not alter the base price structures. Discounts become very difficult to withdraw sometimes as the company may face stiff resistance from the buyers.
(v) Zero percent financing: is very commonly used for high priced items like consumer durables and serves to stimulate demand.
3. Special pricing tactics
Special pricing tactics are unique and defy categorization. Managers may use these tactics for various reasons; stimulate demand for specific SKU’s increase store patronage and offer wider variety at a specific price point.
(i) Price lining: when a company establishes prices for different products in its product lines it establishes a price line. Price lining is the practice of offering a product line within its product line. The company may establish four price points for the entire line; say $ 500, $ 750, $ 950 and $ 1250. The company would then price the 40 different varieties of shirts at these four specific price points. This tactic is very commonly used for products line like apparel, shoes, cosmetics, watches, where there is a large variety within the product line.
(ii) Cross benefit pricing is when prices are adjusted across various models of a particular category, such that the margin losses on a specific model are subsidized by a different model. This is similar to loss leader pricing and the aim is gain acceptance for a basic model or set competitive prices for a model that faces greater competition.
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