Page 428 - Marketing Management

DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 405

Discount pricing has become the modus operandi of a surprising number of companies offer-
ing both products and services. Salespeople, in particular, are quick to give discounts in order to
close a sale. But word can get around fast that the company’s list price is “soft,” and discounting be-
comes the norm, undermining the value perceptions of the offerings. Some product categories self-
destruct by always being on sale.
Some companies with overcapacity are tempted to give discounts or even begin to supply a re-
tailer with a store-brand version of their product at a deep discount. Because the store brand is
priced lower, however, it may start making inroads on the manufacturer’s brand. Manufacturers
should consider the implications of supplying retailers at a discount, because they may end up los-
ing long-run profits in an effort to meet short-run volume goals.
Only people with higher incomes and higher product involvement willingly pay more for fea-
tures, customer service, quality, added convenience, and the brand name. So it can be a mistake for
a strong, distinctive brand to plunge into price discounting to respond to low-price attacks. At the
same time, discounting can be a useful tool if a company can gain concessions in return, such as the
customer agreeing to sign a longer contract, order electronically, or buy in truckload quantities.
Sales management needs to monitor the proportion of customers receiving discounts, the aver-
age discount, and any salespeople over-relying on discounting. Higher levels of management
should conduct a net price analysis to arrive at the “real price” of the offering. The real price is af-
fected not only by discounts, but by other expenses that reduce the realized price (see “Promotional
Pricing”). Suppose the company’s list price is $3,000. The average discount is $300. The company’s
promotional spending averages $450 (15 percent of the list price). Retailers are given co-op adver-
tising money of $150 to back the product. The company’s net price is $2,100, not $3,000.

Promotional Pricing

Companies can use several pricing techniques to stimulate early purchase:
• Loss-leader pricing. Supermarkets and department stores often drop the price on well-
known brands to stimulate additional store traffic. This pays if the revenue on the additional
sales compensates for the lower margins on the loss-leader items. Manufacturers of loss-leader
brands typically object because this practice can dilute the brand image and bring complaints
from retailers who charge the list price. Manufacturers have tried to keep intermediaries from
using loss-leader pricing through lobbying for retail-price-maintenance laws, but these laws
have been revoked.
• Special event pricing. Sellers will establish special prices in certain seasons to draw in more
customers. Every August, there are back-to-school sales.
• Special customer pricing. Sellers will offer special prices exclusively to certain customers.
Road Runner Sports offers members of its Run America Club “exclusive” online offers with
price discounts twice those for regular customers. 74
• Cash rebates. Auto companies and other consumer-goods companies offer cash rebates to
encourage purchase of the manufacturers’ products within a specified time period. Rebates
can help clear inventories without cutting the stated list price.
• Low-interest financing. Instead of cutting its price, the company can offer customers low-
interest financing. Automakers have used no-interest financing to try to attract more customers.
• Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch
loans over longer periods and thus lower the monthly payments. Consumers often worry
less about the cost (the interest rate) of a loan, and more about whether they can afford the
monthly payment.
• Warranties and service contracts. Companies can promote sales by adding a free or low-cost
warranty or service contract.
• Psychological discounting. This strategy sets an artificially high price and then offers the
product at substantial savings; for example, “Was $359, now $299.” Discounts from normal
prices are a legitimate form of promotional pricing; the Federal Trade Commission and Better
Business Bureaus fight illegal discount tactics.
Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them
and they lose their effectiveness. If they don’t work, they waste money that could have been put into
other marketing tools, such as building up product quality and service or strengthening product
image through advertising.