PRICING AND SALES PROMOTION:DMINISTERING THE PRICING FUNCTION

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6. ADMINISTERING THE PRICING FUNCTION

Perhaps the most difficult aspect of the pricing decision is to develop the procedures and policies for administering prices. Up to this point, the issue has been on the setting of base or list prices. However, the list price is rarely the actual price paid by the buyer. The decisions to discount from list price for volume purchases or early payment, to extend credit, or to charge for transportation effectively change the price actually paid. In this section, we consider the problems of administering prices.

An important issue relative to pricing is the effect that pricing decisions and their implementation have on dealer or distributor cooperation and motivation as well as on salespeople’s morale and effort. While it is difficult to control prices legally through the distribution channel, nevertheless, it is possible to elicit cooperation and provide motivation to adhere to company-determined pricing pol- icies. Also, because price directly affects revenues of the trade and commissions of salespeople, it can be used to foster desired behaviors by channel members and salespeople.

Price administration deals with price adjustments or price differentials for sales made under dif- ferent conditions, such as:

1. Sales made in different quantities

2. Sales made to different types of middlemen performing different functions

3. Sales made to buyers in different geographic locations

4. Sales made with different credit and collection policies

5. Sales made at different times of the day, month, season, or year Essentially, price structure decisions define how differential characteristics of the product and / or service will be priced. These price structure decisions are of strategic importance to manufacturers, distributors or dealers, and retailers (Marn and Rosiello 1992). In establishing a price structure, there are many possibilities for antagonizing distributors and even incurring legal liability. Thus, it is necessary to avoid these dangers while at the same time using the price structure to achieve the desired profit objectives.

We have noted that the definition of price includes both the required monetary outlay by the buyer, plus a number of complexities including terms of agreement, terms of payment, freight charges, offering a warranty, timing of delivery, or volume of the order. Moreover, offering different products or services in the line with different features or benefits at different prices permits the opportunity to develop prices for buyers who have different degrees of sensitivity to price levels and price differences. Moving from a simple one-price-for-all-buyers structure to a more complex pricing struc- ture provides for pricing flexibility because the complexity permits price variations based on specific product and service characteristics as well as buyer or market differences. Moreover, a more complex price structure enhances the ability of firms to (Stern 1986):

1. Respond to specific competitive threats or opportunities

2. Enhance revenues while minimizing revenue loss due to price changes

3. Manage the costs of delivering the product or service

4. Develop focused price changes and promotions

5. Be more effective in gaining distributors’ cooperation

To accomplish this goal of differential pricing requires identifying the key factors that differentiate price-market segments. Then the elements of the price structure may be developed that reflect these factors.

A product’s list price is the product’s price to final buyers. Throughout the distribution system, manufacturers grant intermediaries discounts, or deductions from the list price. These price conces- sions from producers may be seen as payment to intermediaries for performing the distribution function and for providing time and place utilities. The difference between the list price and the amount that the original producer receives represents the total discounts provided to channel members.

Channel members themselves employ discounts in various ways. Wholesalers pass on discounts to retailers just as manufacturers pass along discounts to wholesalers. Retailers may offer promotional discounts to consumers in the form of sweepstakes, contests, and free samples. Some stores offer quantity and cash discounts to regular customers. Even seasonal discounts may be passed along— for example, to reduce inventory of Halloween candy or Christmas cards.

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