QUELREN A.

MCGOWAN

BSBA 501

PRICING STRATEGY ASYNCHRONOUS WORK

1. Discuss the types of discounts used for business market. Explain the reason behind.

1. Trade/Functional Discount

Trade discounts are usually provided to middlemen for the functions they perform in the distribu-
tion of commodities. For this reason, trade discounts are often called functional discounts.

The justification for trade discounts is that different distributors perform different functions within
the distribution channel and should be compensated accordingly. For example, some wholesalers
provide storage facilities for the manufacturer, help the retailer set up displays, extend credit to the
retailer, as well as perform personal selling services for the manufacturers.

2. Quantity Discount

The basis for quantity discounts lies in the general notion of economies of scale. If a seller of a
product can sell more of a product to a given buyer, various cost savings may occur. It can produce more
and thus reduce unit costs of production. Distribution and marketing expenses are also reduced.

Such a discount is granted for volume purchases (measured in rupees or units), either in a single
purchase (non-cumulative) or over a specified period of time (cumulative, deferred or patronage dis-
count).

The simple non-cumulative quantity discounts serve to encourage orders, but lead to fewer orders
over a given time period.

This ordering policy benefits the seller in that he has few orders to process, ship and invoice,
thereby reducing total costs for these activities. Cumulative discounts do have these benefits because
the discount is based on total volume of purchases over a given time period (usually from a month to a
year in duration).

However, such discounts do tend to tie a buyer to a seller over the discount period, if the buyer is
anxious to obtain the discount.

However, the nature of the product makes it advantageous to place small orders, for example,
perishable products and large consumer durables, or heavy equipment and machines. For these kinds of
products, buying in small quantities is practical and a cumulative discount schedule is beneficial to both
parties.

3. Cash Discount

A cash discount is a reward for the payment of an invoice or account within a specified time period.
For example, the Calcutta Electric Supply Corporation provides a discount to all customers who pay their
bills on or before a scheduled date. From the seller’s viewpoint, immediate payment is preferred so that
the seller can invest the money for the period. Thus, the seller may offer a discount for an immediate
cash payment.

Generally, cash discounts are offered in a business-to-business transaction where the buyer is
negotiating a range of pricing terms, including payment terms. You can imagine that if you offered to
pay cash immediately instead of using a credit card at a department store, you wouldn’t receive a
discount.

4. Seasonal Discount

Business conditions never run smooth. To the periodic fluctuations in the levels of business activity,
the name business cycle is given. And, in reality, industries that are characterised by significant but
regular fluctuations in volume may offer a discount to consumers who purchase the goods (or service) at
non-peak hours.

The more elastic the demand for a product, the heavier price discount it gets, for example, warm
clothes in summer, long distance telephone calls at night, and noon show films, etc. These discounts
represent ways of taking into account various demand factors and the position of the demand curve in
determining the appropriate price.

5. Allowance discount

Generally, the reduction in price of goods or services to the customers for their performance of
assigned work is called allowance. There are two types of allowances:

a. Promotional allowance

The allowance given by producers to wholesalers and retailers for their promotional activities is
called promotional allowance. Such allowance is given to them for advertising, decorating and displaying
goods in their shops at local level. This type of allowance may be given in cash or reduction in price of
goods.

b. Trade-in allowance

The customers who buy goods or services regularly from a firm can return old and unsold goods
back to the firm and buy new goods from the firm. This facility is called trade-in allowance. Such facility
makes customers loyal to the firm permanently.

2. What is geographic pricing? Explain and give examples.

Geographic pricing is the practice of adjusting an item's sale price based on the location of the
buyer. Sometimes the difference in the sale price is based on the cost to ship the item to that location.
But the difference may also be based on what amount the people in that location are willing to pay.
Companies will try to maximize revenue in the markets in which they operate, and geographical pricing
contributes to that goal.
 Geographical pricing is a practice in which the same goods and services are priced differently
based on the buyer's geographic location.

The difference in price might be based on the shipping cost, the taxes each location charges, or
the amount people in the location are willing to pay.

Prices are also varied based on demand, such as a product that is competing with many rivals in
a market versus a product that is exclusive to a market.

Most typically, geographic pricing is practiced by companies in order to reflect the different
shipping costs accrued when transporting goods to different markets. If a market is closer to where the
goods originate, the pricing may be lower than in a faraway market, where the expense to transport the
goods is higher. Prices may be lower if the goods compete in a crowded market where consumers have
a number of other quality options.

Charging higher prices to account for higher shipping charges to faraway locations can make a
seller more competitive, as their products will be available to a larger number of customers. But higher
shipping costs may make local customers avoid buying the product that is shipped from far away in favor
of cheaper, local products.

Prices are also impacted by whether the manufacturer is a price taker instead of a price maker.
A price taker is a company or individual that has to settle for whatever price the market has determined
for the product, as they lack the market share or influence to determine the price. A price maker has the
market share to set the price.

Example:

A type of geographical pricing called "zone pricing" is common in the gasoline industry. This
practice entails oil companies charging gas station owners different prices for the same gasoline
depending on where their stations are located.

Aside from excise taxes, the wholesale price, and thus the retail price, is based on factors such
as competition from other gas stations in the area, the amount of traffic the gas station receives, and
average household incomes in the area—not on the cost of delivering gas to the area.