Multimedia Marketing/Marketing.iso/market/chapter8.8p

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SECTION 8.8  Discounts and Product Line pricing

INSTRUCTIONS Try to imagine all of the possible reasons why marketers might give
discounts to buyers. Then go into this section for insights into this field.

EXAMPLE

Frequent flyer programs are a form of discount. Begun in the early
1980's as a means of luring well-traveled executives into brand
loyalty, frequent flyer bonus programs have become almost essential
for airlines to attract the business trade. The programs all have
the same theme: fly on the sponsoring carrier's routes a certain
number of miles and get free tickets. While the programs are open
to anyone, they target business travelers since they are the group
that does the majority of the flying.

The perks vary but include travel to exotic places such as the
Orient. The air miles required for a free ticket bonus vary. And
there are more benefits possible, as well, including free car rentals
and hotel accomodations.

The programs are in such high demand that many rebelled when some
companies tried to get their employees to turn their bonus tickets
in for company credit. This is a type of consumer discount that has
become a major factor in one industry today. Discounts are also
of major importance in selling to industrial users and intermediaries.

DETAILS

Many producers use intermediaries to perform various portions of the
marketing process. The conventional ways of paying for their services
is through discounts. There are two major types: trade and special
discounts.

"Trade discounts" (also called "margins" and "markups") are the
price allowances offered to channel members to compensate them
for the activities that they perform. They are discounts from the
final purchase price allowed to an intermediary.

The amounts of the trade discounts are largely a function of the
extensiveness of the functions that intermediaries perform for
producers and other intermediaries. If, for instance, a wholesaler
provides a sales force, stores goods, delivers them, finances
retailer purchases, and provides consulting services for suppliers,
the margin is likely to be much greater than if the only function a
wholesaler has is to bring buyers and sellers together.

For example, a manufacturer of an item retailing for ,100 and
distributed directly to retailers might allow a 30 percent markup
on retail to the retailers for handling the item. Retailers would
then pay seventy dollars for each item purchased.

Margins may be stated either on the basis of the final selling
price, as in the above example, or on the basis of cost. It is
traditional in most industries to base them upon the final selling
price.

Another consideration is when there are several levels of intermediaries
involved in the distribution system. Compensation for each level
is typically provided through a chain of discounts. Hence, a retailer
might pay a wholesaler seventy dollars and the wholesaler might pay
the manufacturer fifty dollars, depending on what particular discount
structure is in place.

Markups are generally set at customary or standard levels in industry.
While some intermediaries such as mass merchandisers rely on low
margins to generate volume, manufacturers should establish common
discount structures for all channel members at the same level. Federal
anti-price discrimination laws prohibit charging different prices to
different intermediaries at the same channel level.

PROBLEM 1

A producer of backyard barbeques is in the process of setting a trade
discount for a wholesaler. The amount of the discount should be based
primarily upon:

A. The relative bargaining power of the two parties, as they
   become involved in negotiations.
B. The extensiveness of the functions that the wholesaler provides
   for the manufacturer and other intermediaries.
C. The number of products manufactured by the producer and handled
   by the wholesaler.
D. The number and size of retail firms served by the wholesaler.

WORKED

A producer of backyard barbeques is in the process of setting a trade
discount for a wholesaler. The amount of the discount should be based
primarily upon the extensiveness of the functions that the wholesaler
provides for the manufacturer and other intermediaries. If the
wholesaler is to furnish a full gamut of services for the producer,
the trade discount should be large. The purpose of a trade discount
is to compensate intermediaries for their efforts. Consequently, if
these efforts are substantial, the discount should also be large.
Conversely, if only a few functions are to be performed (as in the
case of a limited function wholesaler) the discount can be small.

Producers should remember that trade discounts are incentives. If
the discount is large, there is an incentive for the wholesaler
to sell the producer's output agressively. If the discount is too
small, they may neglect the producer's offerings and concentrate on
other producers' products.

ANSWER  B
INSTRUCTIONS Try to imagine all of the possible reasons why marketers might give
discounts to buyers. Then go into this section for insights into this field.

EXAMPLE

Frequent flyer programs are a form of discount. Begun in the early
1980's as a means of luring well-traveled executives into brand
loyalty, frequent flyer bonus programs have become almost essential
for airlines to attract the business trade. The programs all have
the same theme: fly on the sponsoring carrier's routes a certain
number of miles and get free tickets. While the programs are open
to anyone, they target business travelers since they are the group
that does the majority of the flying.

The perks vary but include travel to exotic places such as the
Orient. The air miles required for a free ticket bonus vary. And
there are more benefits possible, as well, including free car rentals
and hotel accomodations.

The programs are in such high demand that many rebelled when some
companies tried to get their employees to turn their bonus tickets
in for company credit. This is a type of consumer discount that has
become a major factor in one industry today. Discounts are also
of major importance in selling to industrial users and intermediaries.

DETAILS

Sometimes producers find it necessary to offer intermediaries
added incentives to enlist their agressive support. Audio tape firms
frequently reimburse retailers for money spent to advertise certain
popular tapes; or manufacturers often offer an additional margin to
"kick off" a new product campaign. There are three major types of
special discounts; cash, quantity, and advertising and push money.

"Cash discounts" are discounts granted buyers for paying their
bills in a short period of time. An invoice amount of two thousand
dollars with the statement 2/10/n30 (two percent if paid in ten
days, net in 30 days) means that the buyer pays only ,1,960 if
the bill is paid in ten days. Otherwise the full amount is due in
30 days. Some companies have been successful in extending these
discounts to consumers, as well.

Buyers are well-advised to take advantage of these discounts when
offered by suppliers. Saving 2 percent by paying 20 days sooner
amounts to a 36.5 percent annualized finance charge for not doing so
(365 days/20 days X 2% = 36.5%).

Marketers can use cash discounts to win the loyalty of intermediaries.
If producers offer higher cash discounts than do their competitors,
wholesalers and retailers have an incentive to handle and to feature
the products of the high discounters.

Many buyers, expecially industrial ones, expect to receive discounts
if they buy in large quantities. There are two types of "quantity
discounts". "Noncumulative" discounts are granted on individual orders
above a certain quantity, such as for a full railroad carload.
Generally, these discounts are legal, as long as they are made
available to all intermediaries.

"Cumulative" quantity discounts are extended to buyers who purchase
a large amount--determined by adding individual orders--over an
extended period of time, such as a quarter or a year. Cumulative
quantity discounts granted to intermediaries are generally illegal
under federal price discrimination laws, unless the supplier can
document proof that the cost or competition meeting defenses of the
law apply.

"Advertising" and "Push Money" allowances are special price reductions
offered to intermediaries for them to perform certain promotion
functions. "Advertising allowances" are subsidies, full or partial,
paid to intermediaries to reimburse them for advertising the sponsor's
product, such as when a supermarket advertises that it features a
certain brand of shampoo.

"Push Money" consists of additional payments to intermediaries for
agressively selling a particular product. In turn, it is usually
expected that intermediaries will pass along the additional incentive
to their sales representatives. Generally, these allowances are legal,
provided that they do not result in price discrimination. For some
items, like groceries, offering special discounts is almost a
prerequisite for getting shelf space in a supermarket.

PROBLEM 2

A producer of plastic containers for tools is considering the use
of special discounts. Which of the following statements would not be
true for this company.

A. Noncumulative quantity discounts are legal if made available to
   all intermediaries.
B. Cumulative quantity discounts are legal under federal price
   discrimination laws.
C. Cash discounts are illegal when applied to consumers.
D. Push money allowances are illegal if they result in increased
   revenues to the supplier.

WORKED
A producer of plastic containers for tools is considering the use
of special discounts. Cumulative quantity discounts are not
legal under federal price discrimination laws, so they should be
avoided. This practice is outlawed because it encourages buyers to
place all or much of the purchasing with one company--it tends to
weaken competition. Also, noncumulative quantity discounts can be
justified since larger quantity orders tend to have a lower per
unit cost. This is not true for cumulative discounts--they cannot be
solidly supported as means of reducing costs. In essence, then, the
only reason for cumulative discounts is to reduce competition, so
federal law is against this practice.

ANSWER  B
INSTRUCTIONS Try to imagine all of the possible reasons why marketers might give
discounts to buyers. Then go into this section for insights into this field.

EXAMPLE

Frequent flyer programs are a form of discount. Begun in the early
1980's as a means of luring well-traveled executives into brand
loyalty, frequent flyer bonus programs have become almost essential
for airlines to attract the business trade. The programs all have
the same theme: fly on the sponsoring carrier's routes a certain
number of miles and get free tickets. While the programs are open
to anyone, they target business travelers since they are the group
that does the majority of the flying.

The perks vary but include travel to exotic places such as the
Orient. The air miles required for a free ticket bonus vary. And
there are more benefits possible, as well, including free car rentals
and hotel accomodations.

The programs are in such high demand that many rebelled when some
companies tried to get their employees to turn their bonus tickets
in for company credit. This is a type of consumer discount that has
become a major factor in one industry today. Discounts are also
of major importance in selling to industrial users and intermediaries.

DETAILS

When two or more related products are marketed by a company, the
price of each item in the line should be set in relation to the
prices of the other items. For example, a manufacturer produces
different brands of panty hose at different price levels aimed at
different market segments. In such cases, management must coordinate
the price of each item so that the overall line contributes to the
company goals.


Related items in a line may be substitutes for each other,
meaning that they have high "cross elasticities". This term means
that a change in the price of one item affects the demand for
another. A buyer of a 30 watt stero set, for example, might trade
up if a 40 watt set's price is lowered a bit, or trade down if a 20
watt set's price is too close to the 30 watt set price. (This latter
condition is termed "cannibalization").

Thus, if prices are improperly set in relation to market segment
differences, there may be cannibalization and a loss in profits.
When the prices properly reflect segment differences, however,
there is a good possibility of trading up some of the customers.

Cross elasticities can also take place if products are complements,
such as rivets and rivet machines, cameras and film, and computer
hardware and software. Complements are products that are normally
used together. If the price of one is raised, the demand for the
other may fall. One possible strategy is to keep the price of one
(such as a safety razor) low, so that consumers will purchase many
razors and then assess large prices for razor blades that are needed
in the razors.

PROBLEM 3

A producer of small appliances believes that there is a high cross
elasticity in its product line. This would indicate that:

A. Changes in the price of one product changes demand for another
   product.
B. Changes in the demand for one product changes the costs of
   another product.
C. Changes in consumer income levels increases the demand for two
   different products.
D. Changes in the demand for one product changes the price of another
   product.

WORKED

A producer of small appliances believes that there is a high cross
elasticity in its product line. This would indicate that changes in
the price of one product changes demand for another product. The
products in question may be substitutes or complements. In earlier
discussions of price elasticity we learned that demand is elastic
when a change in price brings out a larger change in the quantity
demanded. The same situation holds for cross elasticities, except
that it involves two products.

ANSWER  A
INSTRUCTIONS Try to imagine all of the possible reasons why marketers might give
discounts to buyers. Then go into this section for insights into this field.

EXAMPLE

Frequent flyer programs are a form of discount. Begun in the early
1980's as a means of luring well-traveled executives into brand
loyalty, frequent flyer bonus programs have become almost essential
for airlines to attract the business trade. The programs all have
the same theme: fly on the sponsoring carrier's routes a certain
number of miles and get free tickets. While the programs are open
to anyone, they target business travelers since they are the group
that does the majority of the flying.

The perks vary but include travel to exotic places such as the
Orient. The air miles required for a free ticket bonus vary. And
there are more benefits possible, as well, including free car rentals
and hotel accomodations.

The programs are in such high demand that many rebelled when some
companies tried to get their employees to turn their bonus tickets
in for company credit. This is a type of consumer discount that has
become a major factor in one industry today. Discounts are also
of major importance in selling to industrial users and intermediaries.

DETAILS

Cross elasticities present a problem in measuring demand. Because
of the operational difficulty, many firms establish "price lines"
for groups of products within a line. These are pre-established
price levels for items within the line. For example, retailers
often sell men's slacks at ,19.95, 24.95, ,,29.95, ,34.5, and
,39.95. These price levels are based upon what the managers consider
to be distinctive price thresholds in the overall market.

Once set, the firm then develops or locates products that can
profitably be sold at each of the price lines. Using cost as a guide,
managers can then concentrate on developing items with the intention
of satisfying a particular segment's needs as an objective. Women's
clothing, appliances, houses, and even motor vehicles are among
the many items companies price in this way.

Price lines are preferred by many consumers. In buying clothing,
for instance, they dislike having to compare the prices of a variety
of items, all selling at different prices. They prefer to go to a
price line that they feel fits their budget and preferences and
compare the various offerings within that line.

Before leaving the area of price, we should consider an additional
item. There are other means of changing an item's price besides
altering the price tag:

1. Changing the quantity included. Potato chips, for example, were
sold largely in one-pound packages some years ago. Today's
large bag costs about the same but is only 8 or 10 ounces. "Unit
Pricing " laws (where the price-per-unit, such as an ounce is
posted) have been passed in many states, enabling many consumers
to better make choices than in the past. Nevertheless, changing the
quantity is one alternative to consider.

2. Giving cents-off coupons or rebates. In effect, the mileage bonuses
offered by air carriers offer travelers this kind of incentive.

3. Offering specially reduced financing plans. The auto industry
frequently uses this incentive to spur purchases.

4. Selling items at special prices through nontraditional channels.
For example, some ski areas in Utah sell lift tickets at discount
prices in major city supermarkets.

In fact, any component of the overall marketing mix might be altered
as an alternative to changing the sales tag price of a product or
service. Accordingly, managers should not set prices in a vacuum.
All components of the marketing mix must be considered.

PROBLEM 4

A woman's clothing store takes advantage of cross elasticities in
the demand for clothing. A way of achieving advantage is:

A. To cannibalize other company products.
B. To get consumers to trade up in women's clothing.
C. To establish price lines for women's clothing.
D. To reduce overhead costs by taking advanges of quantity discounts.

WORKED

A woman's clothing store takes advantage of cross elasticities in
the demand for clothing. A way of achieving advantage is to get
consumers to trade up in women's clothing. The prices of various
clothing items have cross elasticities. If the price of an inferior
item is not far below that of a superior product, it may be possible
to convince consumers to buy the superior one. This may be accomplished
by reducing the price of the higher-quality product, so that it
approaches the consumer's price threshold. Some clothing store
personnel are very adept at trading up customers and attempt this
practice at every turn.

ANSWER  B