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Chapter 14 - Arriving at the Final Price
14-21
• When price is changed or new advertising or selling programs are planned, their
effect on the quantity sold must be considered.
• Marginal analysis or incremental analysis:
• [Figure 14-6] Marketers use marginal analysis to assess advertising, equipment
purchase, and human resource (i.e. salespeople) decisions.
a. The advantages are:
b. The disadvantages are:
[See CH14Fig14-06.xls]
III. STEP 6: MAKE SPECIAL ADJUSTMENTS
TO THE LIST OR QUOTED PRICE LO 14-3]
[Figure 14-7] Marketers make three special adjustments to the list or quoted price.
• Wholesalers adjust list or quoted prices they set for retailers.
• Retailers do the same for consumers.
A. Discounts
• Are reductions from the list price that a seller gives a buyer as a reward for some
activity of the buyer that is favorable to the seller.
• Four kinds of are important in marketing strategy.
1. Quantity Discounts.
Chapter 14 - Arriving at the Final Price
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a. Are reductions in unit costs for a larger order to encourage customers to buy
larger quantities of a product.
b. Are offered at all levels in the marketing channel (wholesaler/retailer).
c. Larger purchases:
• Make more efficient use of production equipment.
• Reduce order-handling costs.
• Allow firms to pass on some of the cost savings as a quantity discount.
d. Quantity discounts are of two general kinds:
• Noncumulative quantity discounts.
– Are based on the size of an individual purchase order.
• Cumulative quantity discounts.
– Apply to the accumulation of purchases of a product over a given time
period, typically a year.
2. Seasonal Discounts.
a. Are used to encourage buyers to stock inventory earlier than their normal
demand would require.
b. Allows marketers to smooth out seasonal manufacturing peaks and troughs for
more efficient production.
c. Rewards wholesalers and retailers for the risk of assuming increased inventory
carrying costs and having supplies in stock when customers want.
3. Trade (Functional) Discounts.
a. A manufacturer gives trade, or functional, discounts to reward wholesalers
and retailers for marketing functions they will perform in the future.
b. Trade, or functional, discounts are reductions off the list or base price offered
to wholesalers and retailers on the basis of:
c. [Figure 14-8] Suppose a manufacturer quotes a price with the following
terms: List price = $100 less 30/10/5.
• The $100 price quote is the manufacturer’s suggested retail price (MSRP).
Chapter 14 - Arriving at the Final Price
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• The first number always refers to the retailer, which receives 30 percent of
the MSRP to cover costs and provide a profit of $30 ($100 × 0.3 = $30).
[See CH14TradeDiscounts.xls]
[See CH14Fig14-08.xls]
d. Traditional trade discounts have been established in various product lines such
as hardware, food, and pharmaceutical items.
e. Although the manufacturer may suggest the trade discounts, the sellers are
free to alter the discount schedule depending on their competitive situation.
4. Cash Discounts.
a. Manufacturers offer retailers cash discounts to encourage them to pay their
bills quickly.
b. A retailer receives a bill quoted at $1,000, 2/10 net 30.
• The bill for the product is $1,000.
c. Retailers provide cash discounts to consumers, in some cases to eliminate the
cost of credit—a discount for cash payment policy.
[See CH14CashDiscounts.xls]
B. Allowances
Allowances, like discounts, are reductions from list or quoted prices to buyers for
performing some activity.
Chapter 14 - Arriving at the Final Price
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1. Trade-in Allowances.
a. Are a price reduction given when a used product is part of the payment on a
2. Promotional Allowances.
a. Promotional allowances:
• Are cash payments or an extra amount of “free goods” awarded sellers in
the marketing channel for…
b. Retailers frequently pass on a portion of these savings to the consumer.
c. Everyday low pricing (EDLP).
• Is the practice of replacing promotional allowances with lower
manufacturer list prices.
MARKETING MATTERS
Customer Value: Everyday Low Prices at the Supermarket = Everyday Low Profits
—Creating Customer Value at a Cost
The reason 76 percent of U.S. grocery stores have not adopted everyday low pricing
(EDLP) is simple: grocery store profit suffers. Grocery stores still prefer using Hi-Lo pricing
based on frequent specials where prices are temporarily lowered, then raised again. Hi-Lo
pricing reflects allowances that manufacturers give supermarkets to push their products.
EDLP eliminates manufacturer allowances and can reduce average retail prices by
up to 10 percent. While EDLP provides lower average prices than Hi-Lo pricing, EDLP
does not allow for deeply discounted price specials. EDLP can create everyday customer
value and modestly increase supermarket sales—but at a cost. Already slim supermarket
chain profits can slip by 18 percent with EDLP without the benefit of allowances as
described earlier.
Also, some argue that EDLP is boring for many grocery shoppers who welcome
price specials. While EDLP has been hailed as “value pricing” by manufacturers,
supermarkets view EDLP as “Everyday Low Profits!”
Chapter 14 - Arriving at the Final Price
14-25
C. Geographical Adjustments
Geographical adjustments are made by manufacturers or even wholesalers to list or
quoted prices to reflect the cost of transportation of the products from seller to buyer.
1. FOB Origin Pricing.
a. FOB means:
• “Free on board” a vehicle (barge, railroad car, or truck) at some location.
b. FOB origin pricing:
• Includes only the cost of loading the product onto the vehicle.
c. The title to the goods passes to the buyer at the point of loading.
d. The buyer becomes responsible for:
• Picking the specific mode of transportation.
e. Buyers farthest from the seller face the big disadvantage of paying the higher
transportation costs.
2. Uniform Delivered Pricing.
a. Is the price the seller quotes that includes all transportation costs.
b. Is quoted as “FOB buyer’s location,” where the seller:
• Selects the mode of transportation.
• Pays the freight charges.
c. There are four kinds of delivered pricing methods:
• Single-zone pricing.
– All buyers pay the same delivered price for the products…
• In multiple-zone pricing.
Chapter 14 - Arriving at the Final Price
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– A firm divides its selling territory into geographic areas or zones.
– The delivered price to all buyers within any one zone is the same.
– Prices across zones vary depending on:
• With FOB with freight-allowed pricing or freight absorption pricing:
– The price is quoted by the seller as “FOB plant—freight allowed.”
• Basing-point pricing:
– Involves selecting one or more geographical locations (basing point)
from which the list prices for products plus freight expenses are
charged to the buyer.
D. Legal and Regulatory Aspects of Pricing [LO 14-4]
[Figure 14-9] Five legal and regulatory restrictions influence the final price.
1. Price Fixing.
a. Price fixing is a conspiracy among firms to set prices for a product and is
illegal per se (per se means “in and of itself”) under the Sherman Act.
• Horizontal price fixing is when two or more competitors explicitly or
implicitly set prices.
• Vertical price fixing.
– Involves controlling agreements between:
* Independent buyers and sellers (a manufacturer and a retailer)
whereby…
b. Manufacturers and wholesalers can fix the maximum retail price for their
products provided the price agreement:
Chapter 14 - Arriving at the Final Price
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• Does not create an “unreasonable restraint of trade.”
c. A “manufacturer’s suggested retail price” or MSRP:
• Is not illegal per se.
d. There appears to be a movement toward a “rule of reason” in horizontal and
vertical price fixing cases.
• This rule holds that circumstances surrounding a practice must be
2. Price Discrimination.
a. Price discrimination is the practice of charging different prices to different
buyers for products of like grade and quality.
• Is prohibited by the Clayton Act as amended by the Robinson-Patman Act.
• Only those price differences that substantially lessen competition or create
b. The Robinson-Patman Act allows for price differentials to different customers
under the following conditions:
• Cost justification defense.
– When price differences charged to different customers…
• When price differences result from:
– Meeting changing market conditions.
• Meet-the-competition defense.
– When price differences are quoted to selected buyers in good faith to
Chapter 14 - Arriving at the Final Price
14-28
• A seller must legally offer promotional allowances to all buyers
distributing its product on a proportionally equal basis.
c. The rule of reason:
3. Deceptive Pricing.
a. [Figure 14-10] Deceptive pricing.
b. The Federal Trade Commission (FTC):
c. The five most common deceptive pricing practices are:
• Bait and switch.
– Exists when a firm offers a very low price on a product (the bait) to
attract customers to a store.
– Once in the store, the customer is persuaded to purchase a higher
priced item (the switch) using a variety of tricks:
• Bargains conditional on other purchases.
– Exists when a buyer is offered “1-Cent Sales,” “Buy 1, Get 1 Free,”
and “Get 2 for the Price of 1.”
– Such pricing is legal only if:
* The first items are sold at the regular price…
• Comparable value comparisons.
– Advertising such as “Retail Value $100.00, Our Price $85.00” is
deceptive if…
Chapter 14 - Arriving at the Final Price
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– A verified and substantial number of stores in the market area do not
price the item at $100.
• Comparisons with suggested prices.
– A claim that a price is below a manufacturer’s suggested or list price
may be deceptive if…
• Former price comparisons.
– When a seller represents a price as reduced, the item must have been
offered in good faith at a higher price for a substantial previous period.
d. Marketers should be ethical when making and publicizing pricing decisions.
e. A frequently used pricing practice is to offer products and services for free—a
great price! But this can be deceptive.
4. Geographical Pricing.
a. FOB origin and FOB freight-allowed pricing practices are legal, providing no
conspiracy to set prices exists.
b. Basing-point pricing:
• Can be illegal under the Robinson-Patman Act and the Federal Trade
Commission Act…
c. Geographical pricing practices have been immune from legal and regulatory
restrictions, unless there is:
• A conspiracy to lessen competition exists under the Sherman Act.
5. Predatory Pricing.
a. Predatory pricing is the practice of charging a very low price for a product
with the intent of driving competitors out of business.
b. Once competitors have been driven out, the firm raises its prices.
c. This practice:
Chapter 14 - Arriving at the Final Price
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LEARNING REVIEW
14-6. Why would a seller choose a dynamic pricing policy over a fixed-price policy?
14-7. If a firm wished to encourage repeat purchases by a buyer throughout a year,
would a cumulative or noncumulative quantity discount be a better strategy?
14-8. Which pricing practices are covered by the Sherman Act?
Chapter 14 - Arriving at the Final Price
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APPLYING MARKETING KNOWLEDGE
1. Under what conditions would a digital camera manufacturer adopt a skimming price
approach for a new product? A penetration approach?
Answers:
a. Skimming pricing approach. A digital camera manufacturer might adopt a skimming
b. Penetration pricing approach. A penetration price approach might be adopted if the
new product’s unit production and marketing costs fall dramatically as production
2. What are some similarities and differences between skimming pricing, prestige
pricing, and above-market pricing?
Answers:
a. Similarities. Skimming, prestige, and above-market pricing all involve setting a
b. Differences. Frequently, a skimming price approach is used when there are no
3. A producer of microwave ovens has adopted an experience curve pricing approach
for its new model. The firm believes it can reduce the cost of producing the model by
20 percent each time volume doubles. The cost to produce the first unit was $1,000.
What would be the approximate cost of the 4,096th unit?
Chapter 14 - Arriving at the Final Price
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[See CH14AMKQ3.xls]
4. The Hesper Corporation is a leading manufacturer of high-quality upholstered sofas.
Current plans call for an increase of $600,000 in the advertising budget. If the firm
sells its sofas for an average price of $850 and the unit variable costs are $550, then
what dollar sales increase will be necessary to cover the additional advertising?
[See CH14AMKQ4.xls]
5. Suppose executives estimate that the unit variable cost for their DVD recorder is
$100, the fixed cost related to the product is $10 million annually, and the target
volume for next year is 100,000 recorders. What sales price will be necessary to
achieve a target profit of $1 million?
Chapter 14 - Arriving at the Final Price
a. Profit equation assumptions. Recall the profit equation from Chapter 13.
b. Sales price calculation.
[See CH14AMKQ5.xls]
6. A manufacturer of motor oil has a trade discount policy whereby the manufacturer’s
suggested retail price is $30 per case with the terms of 40/20/10. The manufacturer
sells its products through jobbers, who sell to wholesalers, who sell to gasoline
stations. What will the manufacturer’s sales price be?
Answer:
a. Trade discount assumptions. The motor oil manufacturer’s trade discount policy of
b. Manufacturer’s sales price calculation. Using Figure 14-8, the structure of the trade
discounts for each channel member is calculated as follows:
[See CH14AMKQ6.xls]
14-34
7. Suppose a manufacturer of exercise equipment sets a suggested price to the consumer
of $395 for a particular piece of equipment to be competitive with similar equipment.
The manufacturer sells its equipment to a sporting goods wholesaler who receives 25
percent and a retailer who receives 50 percent of the selling price. What demand-
oriented pricing method is being used, and at what price will the manufacturer sell
the equipment to the wholesaler?
Answers:
[See CH14AMKQ7.xls]
8. Is there any truth in the statement, “Geographical pricing schemes will always be
unfair to some buyers?” Why or why not?
Chapter 14 - Arriving at the Final Price
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BUILDING YOUR MARKETING PLAN
To arrive at the final price(s) for your offering(s):
1. In Chapter 13, you considered your customers and competitors and set three possible
prices. Now, modify those three prices analysis in light of (a) pricing considerations
for demand-, cost-, profit-, and competition-oriented approaches described in this
chapter and (b) possibilities for discounts, allowances, and geographic adjustments.
2. Do a break-even analysis for each of these three new prices.
3. Choose the final price(s).
Have students list their assumptions for the factors mentioned in Question #1 in their
Helping with Common Student Problems
