Price Reductions

In addition to deciding about the base price of products and services, marketing managers must also set policies regarding the use of discounts and allowances. There are many different types of price reductions–each designed to accomplish a specific purpose. The major types are described below.

Discounts

Quantity discounts are reductions in base price given as the result of a buyer purchasing some predetermined quantity of merchandise. In a B2B environment, a noncumulative quantity discount applies to each purchase and is intended to encourage buyers to make larger purchases. A cumulative quantity discount applies to the total bought over a period of time. The buyer adds to the potential discount with each additional purchase. Such a policy helps to build repeat purchases. Both Home Depot and Lowe’s offer a contractor discount to customers who buy large quantities. Examples of quantity discounts for consumers are everywhere, for example BOGO (Buy One Get One free) or buy 3 for the price of 2. There are as many quantity discount deals as there are products to price.

Seasonal discounts are price reductions given for out-of-season merchandise, such as Halloween going on sale on November 1st or coats being discounted as the weather gets warmer. The intention of such discounts is to spread demand over the year, which can allow fuller use of production facilities and improved cash flow during the year. Seasonal discounts are not always straightforward. It seems logical that gas grills are discounted in September when the summer grilling season is over, and hot tubs are discounted in January when the weather is bad and consumers spend less freely. However, the biggest discounts on large-screen televisions are offered during the weeks before the Super Bowl when demand is greatest. This strategy aims to drive impulse purchases of the large-ticket item, rather than spurring sales during the off-season.

Cash discounts are reductions given to customers for paying cash or within some short time period. For example, a 2 percent discount on bills paid within 10 days is a cash discount. The purpose is generally to accelerate the cash flow of the organization and to reduce transaction costs. Generally cash discounts are offered in a B2B transaction where the buyer is negotiating a range of pricing terms, including payment terms. You can imagine that if you offered to pay cash immediately instead of using a credit card at a department store, you wouldn’t receive a discount.

Trade discounts are price reductions given to intermediaries (e.g., wholesalers, industrial distributors, retailers) to encourage them to stock and give preferred treatment to an organization’s products. For example, a consumer goods company might give a retailer a 20 percent discount to place a larger order for soap. Such a discount might also be used to gain shelf space or a preferred position in the store.

Price bundling means grouping two or more related products together and pricing them as a single product. Marriott’s special weekend rates often include the room, breakfast, and free Wi-Fi. Department stores may offer a washer and dryer together for a price lower than if the units were bought separately. The idea behind bundling is to reach a segment of the market that the products sold separately would not reach as effectively. Some buyers are more than willing to buy one product but have much less use for the second. Bundling the second product to the first at a slightly reduced price thus creates some sales that otherwise would not be made. For example, shampoo is sometimes bundled with its matching conditioner because many people use shampoo more than conditioner, so they don’t need a new bottle of conditioner.

Allowances

Similar to trade discounts, personal allowances are also aimed at intermediaries. Their purpose is to encourage intermediaries to aggressively promote the organization’s products. For example, a furniture manufacturer may offer to pay some specified amount toward a retailer’s advertising expenses if the retailer agrees to include the manufacturer’s brand name in the ads.

Some manufacturers or wholesalers also give retailers prize money called “spiffs”, which can be passed on to the retailer’s sales clerks as a reward for aggressively selling certain items. This is especially common in the electronics and clothing industries, where spiffs are used primarily with new products, slow movers, or high-margin items. When employees in electronics stores recommend a specific brand or product to a buyer they may receive compensation from the manufacturer on top of their wages and commissions from the store.

Trade-in allowances also reduce the base price of a product or service. These are often used to help the seller negotiate the best price with a buyer. The trade-in may, of course, be of value if it can be resold. Accepting trade-ins is necessary in marketing many types of products. A construction company with a used grader worth $70,000 probably wouldn’t buy a new model from an equipment company that did not accept trade-ins, particularly when other companies do accept them.

discount vs. allowance

A discount is a reduction in the price of a product or service offered to customers, while an allowance is a specific amount given to the seller or an intermediary to encourage promoting or selling the product.