Deck 16: Pricing Objectives and Policies

Question 1

What are the effective annual interest rates for the following cash discount terms: ( a ) 1/10, net 20; ( b ) 1/5, net 10; and ( c ) net 25

Answer 1

Various types of discounts and allowances are given to the customers in order to encourage sale in the market. Some companies give discounts on quantities, some gives on seasons and some gives directly on the price of the product or at the invoice amount.
Cash discounts refer to the kind of discount which is given on the price of the product or at the invoice amount. So, that the customers gets ready to the pay the bill and purchase the product. It is always a discount of 20% also attracts customers to buy the product which he/she has not planned to buy.
The following annual terms in cash discount terms means the following:
1. 1/10, net 20: This means that the buyer can take 1% discount to the customer on the invoice value if the amount is paid within 10 days. Otherwise the full amount will be due for 20 days. And if the customer don't pay the full amount till 20 days then interest will be charged afterwards
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2. I/5, net 10: This means the customer can avail 1% discount on the face value of invoice till 5 days. Otherwise the full amount has\as to be paid by him/her within 10 days. And if the customer doesn't pay the full amount till 10 days then interest will be charged afterwards.
3. Net 25: This means that the customer has to pay full amount of the invoice amount within 25 days from the date of invoice. And if the customer fails to pay the full amount within 25 days then interest will be charged on the due amount.

Question 2

Why would a manufacturer offer a rebate instead of lowering the suggested list price

Answer 2

In manufacturing of a product, manufacturers has to take a lot of decision from promotion to pricing of a product. Manufacturers adopt various strategies to compete in the market and thus make pricing policies of the product. Pricing decision should be taken by manufacturers in such a manner so that the product is acceptable by customers. If pricing is high than the decision affects the profits of the company and if pricing is low than the product is unable to provide enough returns to the company. So pricing decision is an important criteria for the manufacturer.
Pricing is an important part of marketing mix and hence manufacturers should carefully set the price of a product once manufactured. Sometimes manufacturers offer discounts and sales to the customers. Sale offer and discounts are a part of sales promotion which is given to the customers in order to increase the demand and profits. Some manufacturers offer rebates to customers rather than lowering the price of a product. Rebate is a kind of discount given to the customers at the time of purchase. Rebate may be in the form of cash or in the form of incentives provided to the customers.
Manufacturers generally provide rebate to the customers instead of lowering the price of product because of the following reasons-
1. Customers perceive the product differently and know the actual value of the product. If the retails price of the product is low than customers find some issue with the quality and if retail price of the product is high than customers perceive the product is good and accept the discount given and expects better value for money.
2. Providing rebates on a product increases the demand as customers find rebates are applicable only for short duration. Thus manufacturers can gain more profits.
3. Manufacturers find some customers who always want to bargain and purchase only those products with some discounts or offer. So manufacturers target that type of customers also by providing rebate on product.
4. Providing rebates also help the marketing managers to attract new customers or move customers who are interested in a product.
Thus providing rebates increases the sales volume of a product and increases the customers in the market.

Question 3

How can a marketing manager change a firm's F.O.B. terms to make an otherwise competitive marketing mix more attractive

Answer 3

F.O.B. refers to freight absorption pricing. It is the process of absorbing the freight cost that the prices could be matched with the next competitor. In this case, the list price is reduced to meet the prices of the competitor. Marketing mix refers to the set of actions taken by the company towards its product, pricing, placing, and promotions.
The marketing manager can change Fob terms by reducing the list price of the product. The marketing manager, in order to serve the market and fulfill the objectives of the organization, will have to do this. This will help the organization gain market share, revenue, and business. Thus it will impact the profits through revenue growth and sales.

Question 4

What type of geographic pricing policy is most appropriate for the following products (specify any assumptions necessary to obtain a definite answer): ( a ) a chemical byproduct, ( b ) nationally advertised candy bars, ( c ) rebuilt auto parts, and ( d ) tricycles

Question 5

How would a ban on freight absorption (that is, requiring F.O.B. factory pricing) affect a producer with substantial economies of scale in production

Question 6

Give an example of a marketing mix that has a high price level but that you see as a good value. Briefly explain what makes it a good value.

Question 7

Think about a business from which you regularly make purchases even though there are competing firms with similar prices. Explain what the firm offers that improves value and keeps you coming back.

Question 8

Cite two examples of continuously selling above the market price. Describe the situations.

Question 9

Explain the types of competitive situations that might lead to a meeting-competition pricing policy.

Question 10

The Marketing Plan Coach software on the text website includes a sample marketing plan for Hill side Veterinary Clinic. Look through the "Marketing Strategy" section.
a. A veterinary clinic located in another town gives its customers a 10 percent discount on their next vet bill if they refer a new pet owner to the clinic. Do you think that this would be a good idea for Hillside Does it fit with Hillside's strategy
b. The same clinic offered customers a sort of cumulative discount-an end-of-year refund if their total spending at the clinic exceeded a certain level. That clinic sees it as a way of being nice to people whose pets have had a lot of problems. Do you think that this is a good idea for Hillside Why or why not

Question 11

CASH DISCOUNTS
Joe Tulkin owns Tulkin Wholesale Co. He sells paper, tape, file folders, and other office supplies to about 120 retailers in nearby cities. His average retailer-customer spends about $900 a month. When Tulkin started business in 1991, competing wholesalers were giving retailers invoice terms of 3/10, net 30. Tulkin never gave the issue much thought-he just used the same invoice terms when he billed customers. At that time, about half of his customers took the discount. Recently, he noticed a change in the way his customers were paying their bills. Checking his records, he found that 90 percent of the retailers were taking the cash discount. With so many retailers taking the cash discount, it seems to have become a price reduction. In addition, Tulkin learned that other wholesalers were changing their invoice terms.
Tulkin decides he should rethink his invoice terms. He knows he could change the percent rate on the cash discount, the number of days the discount is offered, or the number of days before the face amount is due. Changing any of these, or any combination, will change the interest rate at which a buyer is, in effect, borrowing money if he does not take the discount. Tulkin decides that it will be easier to evaluate the effect of different invoice terms if he sets up a spreadsheet to let him change the terms and quickly see the effective interest rate for each change.
a. With 90 percent of Tulkin's customers now taking the discount, what is the total monthly cash discount amount
b. If Tulkin changes his invoice terms to 1/5, net 20, what interest rate is each buyer paying by not taking the cash discount With these terms, would fewer buyers be likely to take the discount Why
c. Tulkin thinks 10 customers will switch to other wholesalers if he changes his invoice terms to 2/10, net 30, while 60 percent of the remaining customers will take the discount. What interest rate does a buyer pay by not taking this cash discount For this situation, what will the total gross sales (total invoice) amount be The total cash discount The total net sales receipts after the total cash discount Compare Tulkin's current situation with what will happen if he changes his invoice terms to 2/10, net 30.
For additional questions related to this problem, see Exercise 17-3 in the Learning Aid for Use with Basic Marketing, 17th edition.

Question 12

Identify the strategy decisions a marketing manager must make in the Price area. Illustrate your answer for a local retailer.

Question 13

Would consumers be better off if all nations dropped their antidumping laws Explain your thinking.

Question 14

How should the acceptance of a profit-oriented, a sales-oriented, or a status quo-oriented pricing objective affect the development of a company's marketing strategy Illustrate for each.

Question 15

How would our marketing system change if manufacturers were required to set fixed prices on all products sold at retail and all retailers were required to use these prices Would a manufacturer's marketing mix be easier to develop What kind of an operation would retailing be in this situation Would consumers receive more or less service

Question 16

Distinguish between one-price and flexible-price policies. Which is most appropriate for a hardware store Why

Question 17

Is price discrimination involved if a large oil company sells gasoline to taxicab associations for resale to individual taxicab operators for 2½ cents a gallon less than the price charged to retail service stations What happens if the cab associations resell gasoline not only to taxicab operators but to the general public as well

Question 18

What pricing objective( s ) is a skimming pricing policy most likely implementing Is the same true for a penetration pricing policy Which policy is probably most appropriate for each of the following products: ( a ) a new type of home lawn-sprinkling system, ( b ) a skin patch drug to help smokers quit, ( c ) a DVD of a best-selling movie, and ( d ) a new children's toy

Question 19

How would differences in exchange rates between different countries affect a firm's decisions concerning the use of flexible-price policies in different foreign markets

Question 20

Are seasonal discounts appropriate in agricultural businesses (which are certainly seasonal)