Pricing Policies

The sales executive’s role in formulating pricing policies is advisory, but all sales executives are responsible for implementing pricing policies. Field sales personnel are the company employees whose jobs consist most directly of persuading buyers to accept the products at the prices asked. Field sales personnel do the actual implementing of pricing policies, but responsibility for implementation is the sales executive’s alone. Because of their impacts upon the ease of making sales, then, pricing policies are of direct interest to sales executives and sales personnel.

1. Policy on Pricing Relative to the Competition

Every company has a policy regarding the level at which its products are priced relative to the competition. If competition is price-based, a company sells its products at the same price as its competitors. If there is nonprice competition, the choice is one of three alternative policies.

Meeting the competition. Meeting the competition is the most com­mon choice. Companies competing on a nonprice basis meet competitors’ prices, hoping to minimize the use of price as a competitive weapon. A meeting-the-competition price policy does not mean meeting every com­petitor’s prices, only the prices of important competitors—“important” in the sense that what such competitors do in their pricing may lure custom­ers away.

Pricing above the competition. Pricing above the competition is less common but is appropriate in certain situations. Sometimes higher-than- average prices convey an impression of above-average product quality or prestige. Many buyers relate a product’s quality to its price, when it is difficult to judge quality before buying. A policy of pricing above the com­petition needs the support of strong promotion by both the manufacturer and the intermediaries.

One tactic aimed toward obtaining the promotional support of dealers is to set high list (resale) prices. These prices, the prices that the manu­facturer suggests the dealers use in reselling the products, include above­average markups. intermediaries pass the higher markups on to final buyers in the form of higher prices, but increased support by the dealers of the manufacturer’s product more than offsets the sales-depressing tendency of the higher prices and may even increase total unit sales. For a product to compete at a price above the competition, it must either be so differen­tiated that buyers believe it to be superior to its competitors’ offerings or intermediaries must enthusiastically promote it. The manufacturer’s sales personnel play key roles, of course, in securing this kind of promotion from the intermediaries.

Pricing under the competition. Not many manufacturers, at least those with sales forces, willingly price under the competition. However, some, such as in the clothing industry, price under their competitors and appear to have demonstrated, at least to their own satisfaction, that aggressive pricing increases market demand and keeps new competitors from enter­ing the field. Sales executives, quite generally, dislike this alternative and contend that it causes sales personnel to sell at a price more than the product.

2. Policy on Pricing Relative to Costs

Every company has a policy regarding the relationships between its prod­ucts’ prices and the underlying costs. Long-run sales revenues must cover all long-run costs, but short-run sales revenues do not have to cover short- run costs. Sales revenue, of course, equals unit volume sold times price. Most companies follow a full-cost pricing policy under most circumstances, but most also spell out the circumstances under which departures are permissible.

Full-cost pricing. Under full-cost pricing, no sale is made at a price lower than that covering total costs, including variable costs and allo­cated fixed costs. The reasoning is that if short-run sales revenues cover short-run costs, they also cover long-run costs. Nevertheless, it must be recognized that the price buyers are willing to pay bears little rela­tionship to the seller’s cost—no one knows this better than the field sales personnel and the sales executive who leads them. Moreover, as cost accountants admit, it is next to impossible to determine “real” costs (especially with respect to allocating a share of fixed costs to a particu­lar unit of product). Then, too, even if it were possible to determine real costs, there are times when prices on products already on hand must be cut below full cost to sell at all. There is a need, therefore, for a policy detailing the conditions under which prices that do not cover full cost may be used.

Promotion pricing. Particularly in industries producing consumer nondurables, pricing is a promotional tool. Thus, for instance, a com­pany launching a new packaged convenience food may offer it at a “special low introductory price.” A second example of the use of a low introductory price occurs when a company invades a geographical mar­ket in which a competitor is already well entrenched—Folger’s coffee used this strategy when it brought its brand into markets east of the Mississippi in which Maxwell House was the long-established market leader. Other circumstances in which pricing is used as a promotional tool include ones in which management wishes to counter the effects of competitors’ increases in promotional activity (e.g., heavier or more effective advertising, the use of instore demonstrators, or more frequent calls on customers by competitors’ sales personnel) and to counter them quickly.

Contribution pricing. Using a contribution-pricing policy means pric­ing at any level above the relevant incremental costs.2 Suppose that a seller is offered a special contract to supply a large buyer, who will not pay the going price. The buyer argues that the lower price is justified because of savings to the seller in selling time, credit costs, handling expenses, and the like. Still, the demanded price concession exceeds the likely savings, so that total sales dollars from the proposed transac­tion are not sufficient to cover total costs. Should the seller accept this proposition? The seller should accept the order if the resulting total sales dollars are sufficient not only to cover all incremental costs but to make a contribution to fixed costs and/or profits. After all, current sales at the going price may already cover the fixed costs, and the sale at a special price will not raise fixed costs (assuming the incremental costs are all variable), so this sale need not bear an allocated share of fixed costs to yield net profit. So long as the proposed price (times the number of units ordered) more than covers the out-of-pocket costs of the transaction, the excess is profit.

Three important conditions, however, should all be present for such offers to be accepted: (1) the company already has the necessary production capac­ity, (2) this capacity cannot be put to a more profitable use, and (3) the portion of the output sold below full cost is destined for a different market segment. All three conditions are important, but the third is critical to the continuance of going prices at full cost or above for the bulk of the output. As every sales­person knows, word that one account has been favored with a lower price travels at the speed of light to all other accounts in the market area.

3. Policy on Uniformity of Prices to Different Buyers

In pricing to different buyers, companies choose between (1) a one-price policy, under which all similar buyers are quoted the same price and (2) a variable-price policy, under which the price to each buyer is determined by individual bargaining. In the United States, most marketers of con­sumer goods adhere to a one-price policy, even though many vary prices among different classes of customers and from one geographic region to the next.

The variable-price policy is common wherever individual sales involve large sums, as in many industrial marketing situations. The bargaining power of individual buyers varies with the size of the trans­action. Moreover, as in the industrial market, a large buyer represents a greater potential for future business than does a small buyer, so a seller may make price concessions to gain or retain the large buyer’s patronage.

There are two reasons sales executives consider the one-price policy attractive: (1) since prices are not negotiated with individual customers, sales personnel spend only minimum time discussing price and devote maximum time to “creative selling,” and (2) there is no risk of alienating customers because of preferential prices given others.

4. Policy on List Pricing

A marketer distributing through intermediaries either (1) does not sug­gest standardized resale (list) prices or (2) seeks to control intermediar­ies’s resale prices through list pricing. List pricing takes a variety of forms, the two most common being that of printing the price on the package or requiring sales personnel to suggest the resale price to buyers. List pricing is easiest to implement when the marketer utilizes selective or exclusive distribution, inasmuch as the difficulties of enforcement of suggested list prices multiply with increases in the number of intermediaries. Effective enforcement of list pricing means assigning the additional role of “resale price reporter” to sales force personnel.

5. Policy on Discounts

Trade discounts. A manufacturer selling to both wholesalers and retail­ers may quote different prices, that is, offer different “trade discount’s” to each class of customer. Under U.S. federal laws prohibiting price discrimi­nation, discounts—to be legal—must be made available on proportionately equal terms to all similar customers. Wholesalers and retailers are not sim­ilar customers; each group performs a different distributive function. The law permits a manufacturer to charge a higher price to retailers than to wholesalers, even though some buyers in each class may buy in the same quantities. Policy on trade discounts depends on the importance (to the manufacturer) of each class of buyer and on the relative bargaining power of each class of buyer.

Quantity discounts. Quantity discounts are price reductions granted for purchases in a stated quantity or quantities and are normally aimed to increase the quantities customers buy. Through price reductions, sellers increase sales by passing on to buyers part of the savings that result from large purchases. These savings can be considerable, for it may take little, if any, more of a salesperson’s time to sell a large order than to sell a small one. The same holds for order processing, order filling, billing, and trans­portation costs.

The firm using a quantity discount policy in the U.S. market must keep two legal restrictions in mind: (1) the discounts must reflect actual savings—the price reduction can be no greater than the actual savings resulting from the larger quantity ordered—and (2) the discounts must be available on proportionately equal terms to all similar purchasers.

6. Geographical Pricing Policies

One pricing policy of particular interest is that of who should pay the freight for delivering the product to buyers. The answer to this question is important to the sales executive, because it affects price quotations to buyers in different geographical areas. The farther away the customer is from the factory, the greater are the freight charges for a given size order. No matter what policy the company adopts, freight differentials are reflected one way or another in price quotations. Regardless of the policy on payment of shipping charges, its administration is the sales executive’s responsibility. There are three alternatives: (1) F.O.B., or “free on board” pricing, under which the customer pays the freight; (2) delivered pricing, under which the seller pays the freight; and (3) freight absorption, a com­promise between F.O.B. and delivered pricing.

F.O.B. pricing. The marketer using this policy quotes selling prices at the factory (or other point from which it makes sales), and buyers pay the freight charges. Each buyer adds freight to the factory price and determines total delivered cost. F.O.B. pricing results in variations in the resale price that intermediaries put on the product in different areas. In consumer-goods marketing, F.O.B. pricing is used for items that are heavy or bulky relative to their value, for example, canned goods and fresh veg­etables. In industrial marketing of raw materials and heavy machinery, F.O.B. pricing is also in widespread use.

Delivered pricing. The marketer using delivered pricing pays freight charges and includes them in its price quotations. The price is really an “F.O.B. destination” price, and the net return to the seller varies with the buyer’s location. Delivered pricing is appropriate when freight charges account for only a small part of the product’s price. It is a necessary policy when a marketer uses list prices. Standardized resale prices are likely to be obtained if intermediaries pay a uniform nation­wide delivered price—sometimes called a “postage stamp” price. Mak­ers of chewing gum, candy bars, and many drug items, particularly patent medicines, use postage stamp pricing. Because intermediaries all pay the same price, the resale price is roughly the same throughout the entire market.

A variation is zone pricing, under which the market is divided into zones and different prices are quoted to buyers in each zone. The manu­facturer builds the freight charges into its quoted price (as in any delivered pricing policy), but it quotes different prices to buyers situated in different zones.

7. Policy on Price Leadership

All marketers should decide whether they will initiate or follow price changes. In some industries there are well-established patterns of price leadership. In selling basic industrial materials, such as lumber and cement, one company is the price leader and is usually the first to raise or cut prices; other industry members simply follow or, sometimes, fail to follow, as occasionally happens in the case of a price increase, thus causing the leader to reconsider and perhaps to cancel the announced increase. Similar patterns exist in marketing such consumer products as gasoline and bakery goods, where, usually market by market, one company serves as the price leader and others follow. Generally, price leaders have large market shares and price followers, small market shares.

Even when final buyers (for example, ultimate consumers) are not price conscious, producers know that the intermediaries handling their products are sensitive to price changes. In response to even minuscule price changes, up or down, they will consider switching suppliers. Even the marketer of a consumer product competing on a nonprice basis must be alert to impending price changes; the important policy issue is whether to initiate or to follow price changes. The decision depends upon the marketer’s relative market position and the image of leadership that it desires to build and maintain.

8. Product Line Pricing Policy

Pricing the individual members of a product line calls for policy deci­sions. The different items in a product line “compete” with each other; that is, a buyer buying one member of the line does so to the exclusion of others. One decision relates to the “price space” between the prices of individual members of the line. Having the right amount of price space is critical; too little may confuse buyers, and too much leaves “gaps” into which competitors can move and make sales. Sales execu­tives contribute major inputs to this decision through their knowledge of the market, of buyers’ motivations, and of competitors’ offerings and prices.

Other important decisions concern the pricing of the “top” (highest- priced item) and the “bottom” (lowest-priced item) in the line. Compa­nies price the “in-between” members of the line so that they account for the greatest sales volume, using the bottom of the line as a traf­fic builder and the top of the line as a prestige builder. As the traffic builder, the lower-priced item affects total sales far more than does the price of any other item. Price changes on it affect the sales of other line members. A price increase on the traffic builder causes higher sales on other line members. The same is true for the prestige builder; a change in the price of the top of the line influences sales of other line members.

9. Competitive Bidding Policy

In purchasing certain products, industrial and governmental buyers solicit competitive bids from potential suppliers and award the business to the bidder offering the best proposal. A proposal may be selected as best for a number of reasons (for example, price, delivery dates, reputation for quality), depending on which is most important to the buyer. In some industries, competitive bidding is the general rule, and individual manu­facturers have no choice but to participate. In other industries, only a part of the volume is sold on this basis, and each manufacturer decides whether to participate. For example, a typewriter manufacturer who sells to indus­try on a uniform price basis must participate in competitive bidding if it wants orders from governmental agencies (since government purchasing agents at all levels of government are ordinarily required to request com­petitive bids on most purchases). Many manufacturers believe that com­petitive bidding reduces competition to a price basis; consequently, they avoid bid business unless the share of the total market involved is too large to ignore.

In competitive bidding the sales executive and the sales personnel play important roles. Their close contact with the market puts them in a good position to estimate how low a particular price must be to obtain the order. Furthermore, the long-term relationships developed between salespersons and their customers are important in giving the company a chance to make a “second bid” in those cases where industrial buyers give favored suppliers the chance to meet lower bids submitted by competitors. This chance does not exist in competitive bidding for government busi­ness, where closed bids are specified (that is, all bids are opened at the same time and there is no chance for high bidders to adjust their quotes downward). But an effective salesperson can often remove competition from closed government bids by persuading the purchasing agent of the value of a differentiating characteristic of the product so that the purchas­ing agent includes this characteristic in the written specification supplied to potential bidders.

Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.

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