Note on Pricing Discounts and Allowances & Factors Affecting Pricing

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Pricing Discounts and Allowances

The seller generally allows some discount to the buyer. It is usually expressed as a percentage of sale prices. A seller may allow either of the trade and cash discounts or both of them. Trade discount is allowed whether goods are sold for cash or on the credit basis. Cash discount is allowed to encourage the buyer to make payment promptly. The manufacturers also offer allowances to their distributors for providing certain marketing services such as free sample, window display, advertising, etc.

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Pricing Discount

stage 1. Trade Discount

Trade discount is that type of discount which allowed off the quoted price with reference to specific position enjoyed by the buyers in the channel of distribution. The aim of trade discount is to compensate the intermediaries of the distribution channel for their valuable service rendered. It is a percentage deduction of the quoted price. It varies from industry to industry , company to company and product to product in a company.

2. Quantity Discount

Quantity discount is that type of discount which allowed off the quoted price to the buyers on the basis of quantities bought. It is generally allowed on the aggregate of all or specifies classes of product purchases measured in rupee value or physical units or in terms of purchases over a period of time or beyond a specific floor volume.

For example, the discount may be 10% if the order is up to 10 units and additional 5% discount may be offered if the order exceeds 10 units. It may be offered according to the value of purchase made. For instance, a publisher may offer 2.5% additional discount to a distributor if the total value of the order of various books exceeds Rs.100000 during a particular period.

3. Cash Discount

Cash discount is that type of discount which is the deduction from the invoice price granted to all those who clear their bills within the desired deadline. It is a reward to the buyers for timely or prompt payment of the amount due. Its rates are based on the prevailing rates in the market at a given point of time. For example, if a buyer has bought goods worth Rs.1000 and is eligible for 20% trade discount and 5% cash discount for clearing the bill within a fortnight, he enjoys the discounts on quoted price of Rs.1000.

4. Seasonal Discount

Seasonal discount is that type of discount in which deduction is allowed over and above the trade discount in cases of products which have only seasonal demand. Manufacturers of electric fans, coolers or refrigerators may allow a seasonal discount of 10% if an order is placed during the slack season, it can say from November to January and 5% during October and February.

Pricing Allowances

The manufacturer may offer an allowance to distributors for promotional activities, e.g. advertising allowance, window display materials, training in sales demonstration, etc. It amounts to a price reduction of an amount spent by the distributor in performing promotional services. They can be:

  • Trade–in–Allowance

Trade – in – allowance are price reduction given for turning in an old item when buying a new one. It is most common on a motorbike, television, pressure cooker, etc.

  • Promotional Allowance

Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs. In another word, it is a price reduction granted by a seller as payment for promotional services performed by buyers. For example, free goods to dealers, advertising allowance to the retailer, etc.

Factors affecting Pricing

Numerous factors affect the pricing policies and decisions of a firm. Such factors could be studied under two groups: Internal factors and External factors.

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Source: www.slideshare.net

Internal factors

The internal factors which affect pricing include organizational factors, marketing mix, production differentiation, the cost of a product and the objectives.They can be briefly shown below:

  • Organizational factors:

Organizational factors refer to the internal arrangement or mechanism for decision making and its implementation. The arrangements of organizational factors differ widely from concern to concern at the different time in an organization. Pricing decisions occur at two levels. Overall pricing strategy is the advantage of the top executives who determine the basis price range for the product range with reference to market segments. However, the actual pricing is dealt at lower levels.

  • Product differentiation:

Product differentiation is the ability of a manufacturer to make his product distinctive from others in the market. This differentiation is relevant to the consumer and may be real or imaginary but is meaningful. In the case of consumer goods, product differentiation is seen to the maximum possible extent.

  • Objectives of the firm:

A firm may have various objectives and pricing contributions in achieving them. Firms may have various objectives such as maximizing sales revenue, maximizing market share, maximizing customer delight, maintaining a particular image,etc. Pricing policy should be established after proper considerations of the objectives of the firm.

  • Cost of product:

Cost of products also affects the pricing.The price is the cost plus plan. Costs have relevance if market demand and competition are taken into account.Production costs merely determine the business existence and it is the demand and the competition that determine the price. It is the market that sets the price and product costs.

  • Business efficiency:

Business efficiency is an important internal pricing factor in determining the price. The business institution can manage the activities effectively which support to maintain the price. If the business organization is not capable, the business organization cannot manage and control all the activities and as a result, the production cost will be increased and the price of the product will be very high.

External factors

  • Product demand:

Product demand leads in affecting the pricing. Since demand is affected by the potential buyers, their capacity and willingness to pay, their preference etc. are taken into account while fixing the price. A firm can determine the expected price in a few test markets by trying different prices in markets.

  • Competition:

Competition in the market is the main factor in price determination. The information about what price the competitors are charging for similar products and what possibilities lie ahead for raising or lowering prices, also affect pricing. In perfect competition, the price will be fixed by the market mechanism. But in monopoly price will be high.

  • Behavior and nature of buyers:

The behavior and nature of the buyers also lead in affecting pricing. The nature of the consumers also affects their buying behavior and purchasing power. So, obviously, it affects the price level of the product.

  • Suppliers:

The suppliers of raw materials and other inputs can have an effect on the price of a product. For example, if the price of cotton goes up, the increment in price is passed on by suppliers to manufacturers. If a manufacturer appears to be making large profits on a particular product, supplies will attempt to cash in profits by charging more for their supplies.

  • Stage of economy:

Pricing strategy should have to operate under particular economic and climate situation. The absence of competition allows firms to bag any amount for their products in the high price. Economic conditions doesnot reain stable for the longer period of the time .

References:

Koirala, Dr. Kundan Dutta. Elementary Marketing. Kathmandu: Buddha Academic Publishers and Distributors Pvt. Ltd, 2014.

Thapa, Gopal, Dipendra K. Neupane and Dilli Raj Mishra. Introduction to Marketing. Kathmandu: Asmita Books Publishers and Distributors (P) Ltd., 2014.

 
  1.  Discount is an allowance made to the buyers in consideration on marketing services rendered.
  2. Cash discount is the deduction from the invoice price granted to all those who clear their bills within the desired deadline.
  3. The manufacturer may offer allowance to distributors for promotional activities, e.g. advertising allowance, window display materials, training in sales demonstration, etc.
  4. The manufacturer may offer allowance to distributors for promotional activities, e.g. advertising allowance, window display materials, training in sales demonstration, etc.
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