Discounts are sums allowed off a price in consideration for some action. Always expressed as a percentage of list prices, they are given to wholesalers, retailers, distributors, and agents. They include quantity discount, cash discount, trade/functional discount and seasonal discount.
Types of Discount
Cash discount is given to buyers for paying their bills promptly. For example “2/10 net 30” indicates that payment is due in 30 days but the buyer will enjoy 2 percent discount if payment is made within 10 days.
A price reduction is given for purchasing large quantity. It can be given for each purchase or on a cumulative basis. Whichever method is adopted it must be offered to all customers.
Functional discounts or trade discount are given to trade channel members for performing such functions as warehousing, selling, and record keeping and must be given to all trade channel members.
Seasonal discount is given to those who buyout of season. Airlines offer seasonal discounts just as do hotels.
Allowances are given to encourage buyers to participate in a special programme. For instance trade-in allowance is given when you turn in an old product while buying a new one. Dealers are given promotional allowance for participating in promotional programs.
The third major factor is the activities of competitors as they affect pricing decisions. There is competition in virtually all markets but what is of major concern to the marketer is the nature of the competition.
If competitors are few and there exists a dormant player in the market, there is likely to be little reaction to changes in price. On the other hand where there are many competitors with room for more to enter, there is likely to be stiff price competition with high degree price elasticity. It is possible however to reduce the price elasticity where the firm has built loyalty towards its brand.
Company Pricing Objectives
It is quite possible that a firm may set out specific objectives through its pricing decisions. Be that as it may, it is pertinent to note that corporate objectives must be designed with overall marketing mix strategies.
Corporate Pricing Objectives
This could include such goals as rapid market growth or penetration (lower prices), return on capital (higher prices), quality (higher prices) attract low-income segment of the market (lower prices) and so on. Let us take a more detailed look at some of these objectives.
If a company is faced with changing consumer taste, intense competition and overcapacity, it must keep prices low in order to keep the plant going and maintain efficient inventory. Profit is not particularly important. The company’s main focus is to cover variable costs and some fixed costs until things pick up.
Current Profit Maximization
The company is not concerned with long run performance. It estimates demand and costs associated with different price levels, and choose the price that maximizes profits.
Here the company wants to be the dominant player in the market. One way of going about this is to set prices as low as possible in the belief that the market leader will ultimately enjoy the lowest costs and the highest long run profit. Alternatively the company may pursue a target market share say increase from 20 percent to 30 percent in the next two years.
Product Quality Leadership
The company intends to produce the best quality in the market but the product will attract a high price because of the high research and development costs associated with high quality.
This strategy is used largely by organizations that are set up to provide social services and not to make profit. For such organizations, partial cost recovery is sufficient. Universities and polytechnics set prices that lead to partial recovery of costs and expect to make up from grants and subventions.
Their ‘profits’ are measured in terms of the contribution of their products (graduates, skills and research) to the society.
Price communicates to customers about the company and its products. What the price communicates to the customer is quite significant in marketing management and for this reason, pricing decisions must reflect desired corporate image and be appropriate to other marketing mix strategies.
Apart from the factors discussed so far, other factors are important in pricing decision. Such factors as taxation, government subsidies, tariffs and duties, trade and legal/regulatory considerations influence the pricing decisions of firms.
For instance, governments can offer subsidies as incentives for new businesses or organizations engaged in export trade.