Marketers have the ability to fine-tune the base price of products in the marketing mix.
They can use discounts, rebates, and allowances to temporarily change the price to increase sales and profits.
Adjusting Base Price
The Jokester Novelty Company has just finished setting the base prices on their entire line of fun products, including Vomit in a Can, Fart Balloon, and Fake Severed Fingers. The final step for the company is to fine-tune the prices based on short-term objectives and to take advantage of seasonal, competitive, or promotional changes. There are a few ways that pricing can be adjusted for their line of novelty products.
The first pricing weapon Jokester could use is to offer a quantity, cash, functional, or seasonal discount. Discounts are short-term decreases in price that are used to get customers to purchase more product, pay cash rather than credit, or take delivery at different time periods.
Jokester would offer a customer a lower price on their cases of Vomit in a Can if they purchased multiple units (such as 10 cases in a month). This is called a quantity discount and is used to reward customer loyalty and encourage large purchase amounts.Most companies have to invest time to make sure that their bills are paid on time. A second discount can help ensure a quick pay on delivery.
A cash discount is a price reduction offered to a customer in return for paying a bill on time. Jokester plans on offering these discounts, as well, to save the company from billing expenses and dealing with bad debt issues. If a customer pays their bill within 30 days, they will receive ten percent off their bill.A third type of discount is based on distribution assistance and is called a functional discount. This is a discount offered to intermediaries, such as retailers, for distribution efforts. Jokester does not plan on offering this discount, as they directly ship their product to the retailers or consumers via a website.The last type of discount is used to provide incremental sales during slow business periods.
Many companies offer seasonal discounts to increase sales. This is a type of discount that offers a price discount for buying merchandise out of season. This creates a steady demand stream of product for the manufacturer.
Jokester Novelty does offer this discount, because there are times of the year that the product demand decreases and causes inventory issues. Their novelty products do a brisk business during the Halloween time frame. They offer seasonal discounts in the winter and spring to increase sales.
It can be a challenge for Jokester to create a demand for Fake Severed Fingers. A promotional allowance (also known as a trade allowance) is a payment to a dealer for promoting the manufacturer’s products.
A promotional allowance targets the trade, not the consumer. This type of discount is also a promotional tool for the manufacturer. For example, Jokester can offer a retailer a free case of Vomit in a Can if they stock their products on a special display at the end of the aisle. This has helped sell many of their novelty products, since it captured the attention as consumers passed by and stopped to investigate their unusual product line.
The last way Jokester can adjust the base price of their products is by offering a rebate.
This is a cash refund that is given for the purchase of a product during a certain time frame. Consumers can be attracted by the promise of a rebate, but many forget and never apply to receive the money back. Also, some consumers reject the product price when the rebate is over because they know they had purchased the product cheaper.
Jokester’s type of novelty product is not a good fit for a rebate, since the price is already low and they would rather offer in-store sales to stimulate demand.
There are a few ways that companies can further alter the base price of their products. Discounts, promotional allowances, and rebates all allow temporary price alterations that can help stimulate demand and increase sales.Jokester is offering a promotional allowance to a local retailer who is going to feature their Fart Balloon in a big in-store display with salespeople demonstrating the product. Remember, a promotional allowance is a payment to a dealer for promoting the manufacturer’s products. Rebates are a small monetary compensation for a product. Jokester chose not to use rebates because their prices are already so low.
Seasonal discounts are price discounts that are given by manufacturers to retailers who buy their product out of season. Jokester will use these during the winter and spring months to boost sales during their slow periods.
After watching this video, you will be able to explain how companies can use discounts, rebates and allowances to change the base price of products to increase profits.