What Are the Different Types of Pricing Tactics?
Promotional methods are used by manufacturers and distributors to promote the purchase of a product. There are several approaches to this tactic, such as; 1) quantity discounts, 2) cash incentives or discounts, 3) seasonal discounts, 4) rebates, 5) zero percent financing and 6) promotional allowances.
1) Quantity Discounts: Companies offer a reduced per unit price to the buyer for purchasing multiple units in one purchase.
2) Cash Incentives/Discounts: Are offered in exchange for prompt payment of goods (at the point of sale or a short term, such as a 2% discount if the bill is paid in 10 days).
3) Seasonal Discounts: A discount offered for purchasing a product out of season.
4) Rebates: A cash refund for the purchase of a product during a specific period of time. This allows manufacturers to offer their product at a reduced price while avoiding a complete change to their pricing structure.
5) Zero Percent Financing: Financing at zero percent motivates many buyers to make a purchase of a product- this helps move inventory, but does create risk as the purchaser may default.
6) Promotional Allowance: Manufacturers may offer to pay distributors advertising expenses (or a percentage of the cost) to advertise their product.
Value Based Pricing
Value Based pricing takes a customer oriented approach. The price is set based on what the customer deems as a good price compared with the price of other products with similar options. One of the pitfalls of taking this approach is often companies will price products too low in an attempt to gain market share, which is only short-lived because competitors will match their price.
Many companies will establish zones based on customer geographic region to distribute and offset some of the cost burden that is created as a result of transportation expenses. One of the most common methods used is FOB (Freight on Board) shipping. There are 2 approaches, FOB origin (the buyer pays the freight charge from the point of origin) or FOB destination (the seller pays for the freight charge to the destination point).
Generally FOB origin allows the seller to offer lower prices because transportation costs are not being included, however this can limit sales to closer geographic regions as it makes it prohibitively expensive for further regions. This works well when the buyers are larger companies that have established relationships with transportation companies (their volume and use of transportation services allows them to leverage and negotiate better pricing). Conversely, if the buyers tend to be smaller companies and if the seller has established relationships with transportation companies (where rates can be negotiated), then it may make more sense for the sale to be FOB destination; in which case the cost of transportation will be built into the pricing structure.
Two additional tactics that fall within geographic pricing are Uniform Delivered Pricing and Zone Pricing. When taking a uniform delivered pricing approach, the seller will pay all shipping charges and then bill the buyers a flat rate fee. An offshoot of uniform delivered pricing is zone pricing, but in this approach the seller divides geographic regions into zones and charges each buyer within a particular zone a specified rate.
Just as it sounds, a company will offer their goods and services for one fixed price. An example of this structure is Netflix, they offer their customers access to all of their movies for one fixed monthly price.
Flexible pricing is used by car dealerships. This approach allows for a quick sale with customers that are price conscientious. In short, it allows the seller to adjust the price so different customers will pay different prices for the same product or service. This isn’t considered price discrimination because it is the end user rather than a distributor, therefore it bears no impact on the market as a whole, nor does it have an effect on the competitive nature of a market.
When a company offers a product line with items within that line at specific price points, it is considered price lining. For example, a store may sell khaki pants priced at $20, $40 and $70 with no other pants priced in between these prices. This structure makes things easy for the retailer and the customer. For the retailer they have less inventory costs and for the buyer they just need to find a product within their price range.
When a retailer lowers the price of products to at, or below, cost in hopes that customers will buy other products it is called leader pricing. Many grocery stores do this.
Bait pricing is an unethical tactic. It occurs when a company/retailer advertises a particular product at an appealing price to get customers to come in, then when the customer arrives the retailer resorts to high pressure selling techniques to convince the consumer to buy something else that is more expensive.
When a retailer uses an odd/even pricing structure they price bargain items with odd ended numbers and quality items with even ended numbers.
Price bundling is advertising (or selling) 2 or more products together as a single package at a discounted price. This can be persuasive and entice customers to purchase more than they intended to purchase because they feel as though they are getting a good deal; more product for their money.