Pricing chapter - Marketing subject CBSE .

1. Pricing

2. Leader Pricing
• “An aggressive cost setting strategy where
retailers set the price of goods below the
market cost to attract customers.” – Business
Dictionary

3. • The idea behind leader pricing is to generate
store traffic. The items used to get customers
into the store are known as loss leaders. When
customers come into the store to purchase
the loss leaders, they usually end up
purchasing extra items at full retail price. The
retailer makes their profit off of the
unplanned purchases bought with the loss
leaders

4. • When these customers purchase loss leaders,
they are inherently saving money on buying
goods. As they believe they are saving money,
they can used this “saved money” to buy
other things from your store that are priced
much higher to make a profit.

5. • These products are actually called loss leaders
because they “lead” customers into buying
other products from your store that are priced
higher.

6. Advantages
• Increasing Sales – By offering selected products at a much lower price,
you as the retailer can make profits on the goods that your buyers will
purchase with their savings. You directly increase exposure on the loss
leaders and you indirectly boost exposure on the leads. This will actually
increase your sales.
• Exposure to New Stores – A very good method to get customers into
going to one of your new outlets is to offer goods at a very low price. The
enticing prices you set will get more people to go there and your new
outlet will flourish just as well as any of the other existing ones.
• Clearing Inventory –When your outlet is about to receive a new stock of
goods but you are still holding on to older goods on your shelves, you
need to find a way to get rid of them. Loss leader pricing is a good way of
quickly eliminating merchandise to make room for your new stock.
• Marketing – Loss leader pricing is a great sales promotion strategy to
quickly promote some new products by selling them temporarily at a very
low price. This draws in more customers and helps spread the word about
your retail store.

7. Disadvantages
• Risk of Loss – Some companies have some loss
leaders and some leads in their stores but they
never analyze the sales of the products and
pairings. This could lead to significant losses, as
having products drastically discounted does not
guarantee a boost in sales and an increase in
profits. Always monitor and evaluate your sales
on these goods and determine if you are satisfied
with the results. If they are less than anticipated,
then it is best to change things up and determine
new loss leaders and leads for your retail store.

8. • Cherry Pickers – One major problem that is
closely associated with loss leader pricing is the
presence of “cherry pickers”, buyers who only buy
the goods that are discounted but they never
consider buying the other products that are you
leads. Some buyers cherry pick the best deals
when they go shopping. Hence, they are termed
cherry pickers. This poses a serious problem to
retailers because the regular priced items, your
leads, are never being sold. In order to curtail this
issue, restrictions are placed on the number of
loss leads you can purchase at any given time.

10. • Stockpiling – Another frequent problem of
this marketing strategy is when customers
purchase in bulk because they are getting a
bargain for now. They want to cash in on the
situation and they think that they do not have
to buy it again in the near future. Just as with
the problem with cherry pickers, retailers can
curtail the quantity of goods bought by any
given customer.

12. • Possibility of Deception – If the goods are being
sold at a discounted price for too long, then
customers will start to think that the discounted
price is the regular price. When you decide to
discontinue the loss leader pricing scheme, then
customers will instantly notice it and studies
show that retailers experience a drop in sale. In
order to prevent this issue, clearly state that the
discount is limited time offer with a definite end
date. As a result, your unit sales will not drop
after you stop giving discounts.

14. Charecteristics
• Characteristics
• A loss leader may be placed in an inconvenient
part of the store, so that purchasers must walk
past other goods that have higher profit margins.
• A loss leader is usually a product that customers
purchase frequently—thus they are aware that its
unusually low price is a bargain.
• Loss leaders are often scarce, to
discourage stockpiling. The seller must use this
technique regularly if they expect their customers
to come back.

15. • The retailer will often limit how much a customer
can purchase.
• Some loss leader items are perishable and cannot
be stockpiled.
• Some loss leaders, rather than being advertised
as bargains, are high-end products offered below
profit margin to enhance the company's prestige
and/or to attract "lookers" who may buy other
less expensive but more profitable merchandise.

16. Example
• Fruits and vegetables do not last forever. You refrigerator helps to
extend their lifetime, but that is only by a few more days at best. In
grocery stores, these goods are not even contained in a cold
environment but they are stored in baskets and crates usually at
room temperature. Eventually, fruits and vegetables will rot and
because many people buy these goods based on their appearance,
it becomes very difficult to sell them. This poses a major problem to
grocery stores, as they need to get rid of their inventory to replace
it with a new batch of perishable goods.
• A typical technique that stores like Kroger, Costco, and Walmart use
is to sell these products at a ridiculously low price, so low that is
below the market cost. It may seem as if they are selling at a loss
but in fact, they are actually making a sizeable profit on other
goods. These supermarkets will strategically place these perishable
groceries at the back of the store so that consumers walk through
the entire store to get there, looking at other things along the way.

17. Opinions
• The point is not losing a little money. Loss leaders can, if done
incorrectly, lead to devaluing your core service or product. And
attraction of disloyal bargain hunters who see you as a commodity
to be had at the lowest price possible.
• Not to mention alienation of actual customers who didn't get the
lowered price.
• Consequently, do not use your core service or product as a loss
leader. You offer something which naturally leads into or
complements your core service or product. So a bar offers pretzels
and potato chips as a loss leader ...not beer or whiskey.
• Be especially watchful that you attract real customers,
not consumers who show zero loyalty and show even less respect
for your expertise.
• This is at odds with the internet wisdom of devs and designers
offering web dev or logo design services as Fiverr fodder.

18. Opinion
• A loss leader product has been the main driver of
customer acquisition in one of my websites for
the past 5-6 years. It's the product I use most in
advertising because it attracts clicks so well, and
some percentage of the new customers stick
around and buy more. That particular business
already focuses on low prices, so the strategy of
offering something below cost to attract people
looking for a bargain is a good fit.
•

19. Summary
• One use of a loss leader is to draw customers into
a store where they are likely to buy other goods.
The vendor expects that the typical customer will
purchase other items at the same time as the loss
leader and that the profit made on these items
will be such that an overall profit is generated for
the vendor.
•

20. Distinguish between One Price and
Variable Price Policy
• Under one price policy, a seller will charge all
similar types of buyers exactly the same price
and the terms of sale are also the same. There
is no question of negotiation or bargaining.
There is no discrimination shown.
• If discounts offered, they are allowed on equal
terms to all buyers. This is a fair trade practice
and it gains customer’s confidence.

21. • In the USA and other developed countries
particularly at the retail level, they have
adopted one price policy. In India and many
other developing countries, sellers have
usually variable-price policy, i.e., prices are
subject to negotiation.
•

22. • Certain favoured customers are offered lower
prices. The terms of sale, e.g. discounts and
allowances, are granted on unequal terms to
buyers.
•

23. • (a) Advantages of One Price Policy:
• Lower selling costs and no waste of time in
sales talk.

24. • (b) Advantage of Variable Price Policy:
• A seller can have flexibility with different
customers. Certain valuable customers can be
offered lower price. So also bulk buying
discounts may be encouraged. Flexible price
policy also allows cash discounts

25. • On the whole, one-price policy is the best
policy. Variable price policy creates ill-will and
spoils the sellers reputation. It can lead to a
price war and unhealthy competition.
•

26. Airline Pricing Tactics
• One theory is that the airline increases the
airfares if you perform multiple searches on
the same flight. An airline industry expert we
spoke to claims there is anecdotal evidence to
support this, and recommends clearing your
cookies before purchasing a flight on the
internet.
•

27. • Variable pricing on websites appears to be
mostly a supply and demand model. Fewer
cheap flights will be available when more
people are trying to buy them.
•

29. Price Lining
• The process used by retailers of separating
goods into cost categories in order to create
various quality levels in the minds of
consumers.

30. • It is the process that retailers use to separate
goods into various cost categories

31. • Price lining or product line pricing is a method
that primarily uses price to create the
separation between the different models.
With this approach, even if customers possess
little knowledge about a set of products,
customers may perceive they are different
based on price alone.

33. •Price Points
• Car -a value model, a standard model and a
limited model.
• Shirt -300,600,900

34. • Effect on Consumers
• Price lining offers consumers the flexibility of
choice.
• Those seeking additional features or higher
quality are willing to purchase the product at a
higher price point
• Budget conscious shoppers or those that just
want the basics may go for the lower-priced
option.

35. • For instance, a marketer may sell
• A base model
• An upgraded model
• A deluxe model
• each at a different price.

36. • Differences that are inside the product and
not easily viewed (e.g., difference between
laptop computers), then price lining will help
the customer recognize that differences do
exist as long as the prices are noticeably
different.

37. • Price lining can also be effective as a method for
increasing profitability.
• In many cases the cost to the marketer for adding
different features to create different models or
service options does not alone justify a big price
difference.
• For instance, an upgraded model may cost 10%
more to produce than a base model but using the
price lining method the upgraded product price
may be 20% higher and thus more profitable than
the base model.

38. Bait Pricing
• This type of strategy is usually viewed as
unethical and sometimes illegal.
• Retailers will still use it. It involves advertising
something at a very low price to entice a
consumer, but the item is usually offered with
a limited supply.
• Sometimes the company does not even
actually possess the item.

39. • The customer will then come into the store to
purchase the advertised item then find the
exact item is out of stock.
• They will then be encouraged to purchase a
similar, higher-priced item that is available in
store.

40. Example
• New Product Release: Companies will often release an item
with a limited quantity in order to test supply and demand.
• A good example of this type of bait pricing is the release of
the new gaming consoles. Microsoft released a limited
number of XBox One consoles when they first released
them. As the demand grew, Microsoft released more and
more consoles.
• Nintendo also used this strategy when the Wii came out
many years ago. However, the demand for Wiis was so
great, the consoles were frequently out of stock as
Nintendo could not meet demand.
•

41. • Hotels widely use the form of bait-and-switch
tactics known as 'resort fees'.
• They first attract customers by advertising the
lower price (which appears on all promotional
materials and rate comparison engines), and
charge customers the mandatory "resort fee"
when they arrive for check-in.

42. • Recruitment. Many employers and employment
agencies systematically use bait and switch
tactics. Advertising one position and after the
candidate has submitted their CV or taken time
off work to come to a face-to-face interview then
subtly changing the nature of the position or
offering a completely different position. Often
there is no job at all.
•

43. • First, customers are "baited" by
merchants' Advertising products or services at a
low price, but when customers visit the store,
they discover that the advertised goods either are
not availableor are not as good as expected, or
the customers are pressured by sales people to
consider similar, but higher-priced, items
("switching").
•

44. Price Skimming
• Price skimming is sometimes referred to
as riding down the demand curve. The
objective of a price skimming strategy is to
capture the consumer surplus early in the
product life cycle in order to exploit a
monopolistic position or the low price
sensitivity of innovators.[2]
•

46. Limitations
• Skimming encourages the entry
of competitors. When other firms see the
high margins available in the industry, they
will quickly enter.
•

47. • Price skimming occurs in mostly technological
markets as firms set a high price during the
first stage of the product life cycle. The top
segment of the market which are willing to
pay the highest price are skimmed off first.
When the product enters maturity the price is
then gradually lowered.
•

48. • Price skimming is only used when a new product
just entered the market, the business may be
able to charge high prices as some customers
would want to be first to buy the product.
Business usually start with a high price and it will
lower over time so this strategy is mostly used by
technology products.
•

49. • Price skimming occurs for example in the luxury
car and consumer electronics markets. In
consumer electronics, there is a confounding
factor that there is typically high price deflation
due to continual reductions in manufacturing cost
and improvements in product quality - for
example, a printer priced at $200 today would
have sold for a far higher price a decade ago.
•

50. • The book market often combines price skimming
with product versioning in the following way: a
new book is published in hardback at a high price;
if the book sells well it is subsequently published
in paperback at a much reduced price (far lower
than the difference in cost of the binding) to
more price-sensitive customers. The hardback
usually continues to be sold in parallel, to those
consumers and libraries that have a strong
preference for hardbacks.

51. • Apple has executed the skimming pricing
strategy with great results. Each time the
company – and most other tech firms –
introduce a new product, they will charge the
highest price that they know customers will
pay. As those early adopters are satisfied, the
price is lowered, following the demand curve.
•

52. • The iPhone is a perfect example of this
strategy. When it was introduced in 2007, the
original iPhone sold for $499 for a 4GB version
and $599 for an 8GB version. Two months
later, the company reduced the price of the
8GB version by $200.
•

53. Advantages
• Price skimming helps the company in
recovering the research and development
costs which are associated with the
development of new product.
• If the company caters to consumers who are
quality conscious rather than price conscious
than this type of strategy can work in a great
way for a company.

54. Psychological Pricing
• Psychological pricing endeavours to keep
products within stipulated “mental barriers”
of the conventional customer, with marginal
reduction in prices.
• Odd Pricing: The underlying logic behind split
pricing is this: People always tend to be
attracted to a price that seems visually lower.

55. • Although rational thinking should make it
comprehensible to the customer that the
price difference between a round figure and a
psychological price is meagre, often times, he
is compelled to act irrationally.
• That’s because the human mind processes
prices from the left-most digit first.

56. • Instead of charging $20, charging $19.95 for a
product makes the price appear to be in the
"teen ranges" rather than the "twenty ranges."
Thus, the customer perceives the price to be
lower than it actually is. Odd pricing refers to a
price ending in 1,3,5,7,9 just under a round
number, such as $0.19, $2.47, or $64.93. Even
pricing refers to a price ending in a whole number
or in tenths, such as $0.20, $2.50, $65.00.
•

57. • Psychological pricing method based on the belief that
certain prices or price ranges are more appealing to buyers.
This method involves setting a price in odd numbers (just
under round even numbers) such as $49.95 instead of
$50.00. Originally, this practice was meant to prevent
pilfering of cash by forcing a cashier to open the cash-
register (to pay change to the customer) and thus register
the transaction. Although not supported by any research
findings, its proponents claim that the consumers see a
$49.95 price as 'just above $40' and not as 'just below $50.'

58. • Thus, a consumer may think of $5.98 as
"around five dollars," or may consider $395 as
"three hundred and some dollars."

59. • Since psychological pricing brings price tags to
the next lower tens (or hundreds, or
thousands, and so on) when processed from
the left, it creates an illusion that the value is
closer to the left-most digit, when it is actually
exactly the opposite.

60. • The concept of psychological pricing is not
new – in fact, it is more than a century old.
• It started as a price war between newspapers
during the late 1800s, and by the early 1900s,
• Bata, a former Czechoslovakian shoe-maker
introduced it famous “decimal 99” prices.
• The concept caught on and today,
psychological pricing is omnipresent, right
from fuel prices to real estate.

61. Rationale of odd pricing
• Customers are attracted to the digit “9”.
• The power of 9 in marketing can never be
overstated.

62. • By the middle of the twentieth century,
statistics showed that two-thirds of all
sampled price tags ended in an odd digit.
• Prices ending in “9” were always the most
popular, followed by those ending in “5”. In
fact, four out of every five items in retail
stores had prices that either ended in a “9” or
a “5”.

63. Advantages
• Psychological pricing puts products into
specific price segments or bands. Segmenting
odd prices always puts them into the lower
price bands, thus instantly presenting
themselves as being of higher “value” to the
customer. For example, the rounded-off price
of $100 falls within the price band “$100 –
$199”, while the psychological price of $99
falls in the next lower band, i.e. “$1 – $99”.

64. Disadvantages of psychological
pricing:
• Many customers employ rationale rather than
emotion while buying, and this is increasingly
becoming the case. Rational customers cannot
be manipulated by psychological pricing and
will not be attracted by odd prices, since they
will tend to round off prices to the next higher
amount. For example, a rational customer will
see $7.99 as “$8” and not as “$7”.

65. • Psychological pricing establishes control and
accountability in the cashier.
• Since whole currency are much easier to steal than
loose change, it is, hypothetically, very difficult to steal
money obtained by selling oddly priced products.
• For example, when a cashier gets a 100-drham note
for a Dhm.100 item he just sold, it is easy for him to
steal the note. But when he sells a 99 item, he is either
getting several banknotes (tens, ones, etc.) from the
customer, or is returning change from the cash register.
This makes it difficult for him to steal.

69. Dual Pricing
• Dual Pricing is the technique in which different
prices are offered for the same product in
different markets.
• These different prices for the same products
are called dual prices.
• Manufacturers use dual prices mostly in
different countries having different currencies.

71. • There are many forms of dual pricing, but they all come
down to the same basic principal. If you are a
foreigner, you will be charged more for goods and
services than if you are Thai. This could be a small
increase in price, twenty baht more or so, or a
significant increase, think five times the price or
more. That seems like a rather significant difference,
and it is, but if you traveled here on a plane and are
staying in a fancy resort, you can probably afford the
higher price. At least that is the logic behind the
practice.
•

74. • The objective of dual pricing can be to enter a
new market by offering low prices in a foreign
country.
• Generally, dual pricing is not termed as an
illegal process, but if it is done with the
intention of dumping it can be considered
illegal.

75. Premium Pricing
• Premium pricing, also known as “image pricing”
or “prestige pricing,” means pricing a product
above normal market value so that customers
think a product or service is more valuable than
similar offerings.
• Although the price may dissuade some buyers,
premium pricing proponents believe that the
higher cost will create a market perception that
will ultimately bring in more revenue.
•

77. • Premium pricing is the practice of setting a price
higher than the market price, in the expectation
that customers will purchase it due to the
perception that it must have unusually high
quality or reputation.
• In some cases, the product quality is not better,
but the seller has invested heavily in the
marketing needed to give the impression of high
quality.
•

78. • Premium pricing works best in the following
circumstances:
• There is a perception among consumers that the
product is a "luxury" product, or has unusually high
quality or product design.
• The seller can restrict the amount of product sold,
thereby giving its products an aura of exclusivity.
• There are no substitutes for the product. The company
can create this situation by taking aggressive legal
action against anyone attempting to copy its products.
• The product is protected by a patent, and the company
is aggressively maintaining its rights under that patent.

79. • Example of Premium Pricing
• ABC International has developed a patented titanium pen
that stores ink at high pressure, thereby allowing it to store
four times the normal amount of ink.
• The company uses metal etching craftsmen to etch custom
designs into the metal of the pens. Because of the
customized nature of the product and its unique
ink storage system, as well as the legal protection provided
by its patent, ABC elects to price each pen at $2,000, which
is substantially greater than its $200 cost.
• To enhance the image of the product, ABC invests heroically
in advertising the pen in premium magazines, and also
supports it with a lifetime warranty.

82. Advantages
• Increased Visibility
• If you want to raise brand awareness for your product,
premium pricing may be an effective strategy.
• When companies engage in prestige pricing, customers
have a tendency to view their products as more prestigious
and, as a result, more desirable. The assumption is that a
high price indicates that the product quality is high as well.
Further, raising prices can increase product buzz. As people
talk more about your product, brand awareness and
general interest tend to grow as well.
•

83. • Improved Profits
• Finally, premium pricing strategies offer the
obvious advantage of raising a firm’s profits.
To stay profitable, companies must either set
the price per unit high enough to cover the
additional marketing spend or expand their
audiences to sell sufficient volume.
•

84. Disadvantages
The high cost of marketing is a serious drawback
associated with prestige pricing.
After all, customers are unlikely to pay high prices
for products that they’ve never heard of. If you
can’t afford to market your premium brand goods,
you may be better off setting rates at a more
competitive price point.

85. • Limited Customer Base
• After all, you are effectively pricing yourself
out of an entire segment of buyers. If you
choose to employ prestige pricing, you need
to focus your marketing endeavors on top-tier
clients who can afford your business

86. Example
• Samsung replaced Apple as the top premium
(Rs 30,000 and above) smartphone vendor
with a 48% market share in January-March, up
from 31% in October-December. Apple’s share
dropped to 43% from 62%, Counterpoint
Research said.

87. Every day Low Price
• In theory, Every day low price (EDLP) is a great
idea. It refers to a pricing strategy in which a
retailer offers its customers consistently low
prices on every product, without running sales
or price promotions. The store sets prices
fairly and then maintains them for a long time
(until costs change significantly)

88. • EDLP is supposed to help shoppers by
simplifying decision making.
•
•

90. Bundled Pricing
• In a bundle pricing, companies sell a package
or set of goods or services for a
lower price than they would charge if the
customer bought all of them separately.
• Common examples include option packages
on new cars, value meals at restaurants and
cable TV channel plans.
•

91. Price Bundling
• Instead of a consumer having to purchase
each item separately, the items are packaged
together and priced as one item.
• This is usually at a discount than what it would
have been priced at when purchasing each
item separately.
•

94. • Price bundling is a strategy whereby a seller
bundles together many different goods/items
being sold and offers the entire bundle at a
single price.
•

97. Example
• Tjan’s example is a 5-star hotel that charges $750 per night, but the
bottle of water in the room is an extra $10. To most people, $10 is a
lot for a bottle of water and they will make sure they don’t crack it
open lest they see that extra $10 on their bill.
• If the hotel chose to instead bundle the cost of the water into the
room and charge $760 per night, they could advertise bottled water
as a feature.
• In most cases, someone willing to pay $750 for a hotel room is also
willing to pay $760, but they don’t know that they’re being charged
$10 for the water, it’s just a hidden cost rolled into the bundle.
• They get to their room and think, “Wow! Free bottled water!”
•

98. Example
• For example, mobile phone retailers frequently bundle the
prices of several products and services together for their
new customers.
• They offer the phone itself with a package that also
includes the 2-year phone plan, internet access, and phone
charger.
• This bundle benefits the customer because it provides
them with all the tools they need for their phone all at once
and it benefits the mobile phone retailer because they are
selling the customer supplementary products and services
other than just a phone.
•

99. Geographical Pricing
• Geographical price differentials refer to price
differentials based on buyers’ location. The
objective here again is to exploit the
differences in transport costs due to the
varying distances between the locations of the
plants and the customers.
•

100. • Zone pricing:
• Under zone pricing, the seller divides the
country into zones and regions and charges
the same delivered price within each zone,
but different prices between different zones.
Generally speaking, zone pricing is preferred
where the transport cost on goods is too high
to permit their sale throughout the country at
a uniform price.

101. • Example 1 – In this case, let us take the example of a region
which is far off from central warehouse of the firm.
• Supposing the central warehouse of the firm is in a City
whereas the area where the firm is now supplying is in a
rural region.
• The transportation cost is huge. As a result, the final cost of
the product in the rural region will have to be increased.
• Thus, when you compare the price of the rural region with
the city area, you will find the costing to be different. This is
because of geographical pricing.
•

102. • Example 2 –
• In India, there are multiple zones with multiple taxes per zone.
• So for example – Gujarat, which is a state in India has 15% tax
whereas Delhi which is another state has 5% tax.
• If the base cost of the product was 100 Rs, then after taxes, the cost
of the product will be different in Gujarat as well as in Delhi.
• In Gujarat it will be 115 rs whereas in Delhi it will be 105 rs. Here,
the difference in prices is not due to transportation or difference or
any other cost. Here, the difference of geographical price is due to
taxation.
•

103. The multiple real life usage of
Geographical pricing are as follows.
• This is a type of geographical pricing which is most
commonly used in Exports or Imports. In this case,
supposing a seller from China wanted to export a
product to a buyer in USA. Then, the BUYER in USA has
to bear the charges of transport from China to USA.
• The transport charges will not be bourne by China
vendor. Once the China vendor has given the materials
on board a ship or a plane or any transport for that
matter, then he is free from the responsibility of the
goods.
•

104. • 2) Uniform geographical pricing
• Again a variant of geographical pricing where the prices are kept the
same regardless of the possible differences in regional prices. This is
especially useful if the company wants to keep the selling price in
check and does not want to lose its brand equity due to penetrative
pricing or does not want to create an internal war between their
own dealers.
• A simple example of uniform pricing is, region 1 has tax of 5% and
region 2 has tax of 10%. The company directly bills the product at
10% taxation to both – region 1 and region 2. This ensures that the
pricing in both the regions is the same and hence there will be fair
competition. Otherwise, if region 1 was getting cheaper products, it
could have sold off those products in region 2 at 7.5% taxes by
keeping 2.5% margin.

105. • 3) Zonal pricing
• As the name suggests, Zonal pricing is a type of geographical pricing
which uses zones rather then regions to differentiate between the
pricing offered. Let me explain zonal pricing with a hypothetical
example.
• A company known as XYZ has 4 zones – East, west, north south. The
company knows that it has very less competition in the south zone
but it has tremendous competition in the north zone. East zone and
west zone are comparatively neutral and there is average
competition in these zones.
• What the company does is, it reduces the prices of the products
drastically in North zone thereby penetrating in that market against
competition. At the same time, it increases its prices in the South
zone where it is earning ample margins. As a result, with minimal
loss, the company has increased its overall revenue.

106. Target Return Price
• A target return is a pricing model that prices a business
based on what an investor would want to make from
any capital invested in the company. Target return is
calculated as the money invested in a venture plus the
profit that the investor wants to see in return, adjusted
for the time value of money. As a return on
investment method, target return pricing requires an
investor to work backwards to reach a current price.
•

107. • One of the major difficulties in using this pricing
method is that an investor must pick both a
return that can be reasonably attained, as well as
a time period in which the target return can be
reached. Picking a high return and a short time
period means that the venture has to be much
more profitable in the short-run than if the
investor expected a lower return over the same
period, or the same return over a longer period.

108. • The target return price can be calculated as:
• Target return price = unit cost + (desired
return * invested capital) / unit sales

109. • Example for calculating Target Return Pricing:
suppose a pen manufacturer has invested 1
million rupees in the business and wants to set a
price to earn a 20% ROI. The manufacturing cost
of per pen is Rs.16. Assuming that the sales can
reach 50,000 units, the Target return price will be
= 16 + (0.2 * 1000000)/ 50,000 = Rs.20
•

110. Profit Maximisation

111. Discounts and Allowances
• Discounts and allowances are reductions to a
basic price of goods or services.
•

112. Dealing with payment
• Prompt payment Discount
• Trade Discounts are deductions in price given by
the wholesaler or manufacturer to the retailer at
the list price or catalogue price. Cash Discounts are
reductions in price given by the creditor to the debitor
to motivate the debitor to make payment with in
specified time . These discounts are intended to speed
payment and thereby provide liquidity to the firm.
They are sometimes used as a promotional device. we
also explain that discount is relaxation in price.
•

113. • Examples[edit]
• 2/10 net 30 - this means the buyer must pay within 30
days of the invoice date, but will receive a 2% discount
if they pay within 10 days of the invoice date.
• 3/7 EOM - this means the buyer will receive a cash
discount of 3% if the bill is paid within 7 days after the
end of the month indicated on the invoice date. If an
invoice is received on or before the 25th day of the
month, payment is due on the 7th day of the next
calendar month. If a proper invoice is received after
the 25th day of the month, payment is due on the 7th
day of the second calendar month.

114. • Partial payment discount [edit]
• Similar to the Trade discount, this is used
when the seller wishes to improve cash
flow or liquidity, but finds that the buyer
typically is unable to meet the desired
discount deadline. A partial discount for
whatever payment the buyer makes helps the
seller's cash flow partially.

115. • Preferred payment method discount [edit]
• Some retailers (particularly small retailers with
low margins) offer discounts to customers
paying with cash, to avoid paying fees
on credit card transactions.

116. Seasonal Discount
• These are price reductions given when an
order is placed in a slack period (example:
purchasing skis in April in the northern
hemisphere, or in September in the southern
hemisphere).
•

117. Dealing with quantity
• Cumulative quantity discount[edit]
• Cumulative quantity discounts, also called
accumulation discounts, are price reductions
based on the quantity purchased over a set
period of time. The expectation is that they
will impose an implied switching cost and
thereby bond the purchaser to the seller.

118. • Non-cumulative quantity discount [edit]
• These are price reductions based on the
quantity of a single order. The expectation is
that they will encourage larger orders, thus
reducing billing, order filling, shipping, and
sales personnel expenses.

119. • Geographical Discounts:
• Geographical discount structures refer to price
differentials based on buyers’ (or markets’)
location. They’ are important when transport
costs are high relative to the selling price,
since the manufacturer can then gain from
differences in transport costs due to varying
distances between the locations of plants and
the customers.

121. Trade Discount
• Trade discounts, also called functional discounts, are
payments to distribution channel members for
performing some function. Examples of these functions
are warehousing and shelf stocking. Trade discounts
are often combined to include a series of functions, for
example 20/12/5 could indicate a 20% discount for
warehousing the product, an additional 12% discount
for shipping the product, and an additional 5% discount
for keeping the shelves stocked. Trade discounts are
most frequent in industries where retailers hold the
majority of the power in the distribution channel
(referred to as channel captains).

122. • Trade discounts are given to try to increase
the volume of sales being made by the
supplier.
•

123. Employee Discount
• Employee discount [edit]
• A discount offered by a company
to employees who buy its products.
• In 2005, the American automakers ran
an "employee discount" for all
customers promotional campaign in order to
entice buyers, with some success.

124. • Age-related discounts

125. Toddler discount, child discount, kid
discount[edit]
A• A discount, or free service, offered to children
younger than a certain age, commonly for
admission to entertainments and attractions,
restaurants, and hotels. There may be a
requirement that the child be accompanied by an
adult paying full price. Small children often travel
free on public transport, and older ones may pay
a substantially discounted price; proof of age may
be required.
•

126. Senior discount[edit]
"• A discount offered to customers who are above a certain relatively
advanced age, typically a round number such as 50, 55, 60, 65, 70,
and 75; the exact age varies in different cases. The rationale for a
senior discount offered by companies is that the customer is
assumed to be retired and living on a limited income, and unlikely
to be willing to pay full price; sales at reduced price are better than
no sales. Non-commercial organizations may offer concessionary
prices as a matter of social policy.[5] Free or reduced-rate travel is
often available to older people (see, for example, Freedom Pass). In
United States most grocery stores offer senior discounts, starting
for those age 50 or older, but most discounts are offered for those
over 60.[6]
•

127. Special prices offered to local
residents[edit]
D• Discounts are common in tourist destinations.
In Hawaii, for example, many tourist attractions,
hotels, and restaurants charge a deeply
discounted price to someone who shows proof
that they live in Hawaii; this is known as a
"Kama'aina discount," after the Hawaiian word
for an old-timer or native.[10] It is also known
outside of Hawaii but in the Hawaiian islands as a
resident discount.
•

128. Discount Card
• Sometimes a document, typically a plastic card
similar to a payment card, is issued as proof of
eligibility for discounts. In other cases, existing
documents proving status (as student, disabled,
resident, etc.) are accepted. Documentation may
not be required, for example, for people who are
obviously young or old enough to qualify for age-
related discounts. In some cases, the card may be
issued to anyone who asks.
•

129. Coupon
• A discount, either of a certain specified amount or a
percentage to the holder of a voucher, usually with
certain terms. Commonly, the terms involve the terms
of other discounts on this page, such as being valid
only if a certain quantity is bought or only if the
customer is older than a specified age. Coupons are
often printed in newspapers, brochures, and
magazines, or can be downloaded and printed
from Worldwide Web pages that can be accessed via
the Internet.
•

130. Rebate
• A refund of part of sometimes the full price of the
product following purchase, though some rebates
are offered at the time of purchase. A particular
case is the promise of a refund in full if applied
for in a restricted date range some years in the
future; the hope is that the promise will lure
customers and increase sales, but that the
majority will fail to meet the conditions for a valid
claim.
•

131. • Other
• Promotional allowances - These are price
reductions given to the buyer for performing
some promotional activity. These include an
allowance for creating and maintaining an in-
store display or a co-op advertising allowance.
• Brokerage allowance - From the point of view of
the manufacturer, any brokerage fee paid is
similar to a promotional allowance. It is usually
based on a percentage of the sales generated by
the broker.