Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 9

PRICING THE PRODUCT

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A rebate can be a very effective pri ce disco unt.

to each purchase and is intended to encourage buyers to make larger purchases. This means

that the buyer holds the excess

until

is used, possibly cutting the inventory

cost of the seller and preventing the buyer from switching to a competitor at least until the

stock is used. A cumulative quantity discount applies

the total bought over a period of

time. The buyer adds to the potential discount with each additional purchase. Such a pol-

icy helps to build repeat purchases. Building material dealers, for example,

such a pol-

icy quite useful in encouraging builders to

their purchase with one dealer and

FLEXIBILITY

2 39

to continue with the same dealer over time. It should be noted that such cumulative quan-

tity discounts are extremely difficult to defe nd if attacked in the courts.

Seasonal discounts are price reductions given or out-of-season merchandise. An exam-

ple would be a discount on snowmobiles during the summer. The intention of such discounts

is to spread demand over the year. This can allow fuller use of production facilities and

improved cash flow duri ng the year. Electric power companies use the logic of seasonal

discounts to encourage customers to shift consumption to off-peak periods. Since these com-

panies must have production capacity to meet peak demands, the lowering of the peak can

lessen the generating capacity required.

Cash discounts are reductions on base price given to customers for paying cash or

within some short time period. For example, a two-percent discount on bills paid within

ten days is a cash discount. The purpose is generally to accelerate the cash flow of the

organization.

Trade discounts are price reductions given to middlemen (e.g., wholesalers, indus-

trial distributors, retailers) to encourage them to stock and give preferred treatment to an

organization's products . For example, a consumer goods company may give a retailer a 20%

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.

Personal allowances are similar dev ices aimed at middlemen. Their purpose is to

encourage middlemen to aggressively promote the organization's products. For example,

a furniture manufacturer may offer to pay some specified amount toward a retailer's adver-

tising expenses if the retailer agrees to include the manufacturer's brand name in the ads .

INTEGRATED MARKETING

•

BEAM ME

SCOITYI

You remember William Shatner, a.k.a. Captain James T. Kirk.

enues from airline tickets, rental cars, and hotel rooms.

As

he represented the epitome of integrity and profes-

2003, Priceline estimates that only 50% of revenues wiII come

sionalism. Death was better than compromise. Yet, here he

from these sources.

is doing rather strange TV ads for Pliceline.com. Inc. Why?

By June 2000, users were able to name their price for long-

Probably because he's being paid a ton of money, and he's

distance phone service, gasoline, and cruises. At the end of

having fun . Worki ng for an apparent winner is also exciting.

2000, Priceline.com started selling blocks of long-distance

We say "apparent" because transferring Priceline's

phone time to

companies. Later, it will offer them ad

patented "name your own price" system of selling airline tick-

space, freight services, and office equipment. New joint ven-

ets, groceries, cars, gasoline, telephone minutes, and a raft of

tures are in the works with companies in Hong Kong, Aus-

other products is proving quite difficult. Complicating mat-

tralia, Japan, Europe, and Latin America.

ters, several airlines and hotels are studying whether to launch

Execs at Priceline say they're on 'the right track and that

Web services that could cut the legs out from under Price-

they're building a broad-based discounting powerhouse.

line's established travel businesses.

Priceline could soon face stiff competition from its own

Sources: Pamela L. Moore, "Name Your Price-For Everything?"

suppliers. Hyatt, Marriott, Starwood, and Cendant-most of

Business Week, ApriJ 17,2000, pp. 72-75;

to Let

which sell excess hotel rooms through Priceline-are having

Callers Name Price," Los Angeles Times , Nov. 9, 1999, p. 3;

serious discussions about starting

own company to dis-

"Priceline to offer auto insurance," Wall St reet

Aug. 3,

tribute over the Internet. Essentially, these chains worry that

2000, p. J2; "Priceline teams up with 3 phone

to sell

long distance," Wall Street Journal, May 2000, p. 16.

by handing

to PriceIine, they could lose control of

customers. Several airlines have the same concerns.

To stay one step ahead, Priceline has decided to introduce

18 new products. Initially, Priceline generated 90% of its rev-

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