Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

17. Pricing Objectives and
    Policies

Text © The McGraw−Hill

Companies, 2002

Pricing Objectives and Policies 499

the year. For example, Kyota offers wholesalers a lower price on its garden tillers if

they buy in the fall—when sales are slow. The wholesalers can then offer a seasonal

discount to retailers—who may try to sell the tillers during a special fall sale.

Service firms that face irregular demand or capacity constraints often use seasonal

discounts. For example, MCI offers a discount for night-time calls when the load of

business calls is low. Some tourist attractions, like ski resorts, offer lower weekday

rates when attendance would otherwise be down.

Most sales to businesses are made on credit. The

seller sends a bill (invoice) by mail or electronically,

and the buyer’s accounting department processes it for

payment. Some firms depend on their suppliers for

temporary working capital (credit). Therefore, it is

very important for both sides to clearly state the terms

of payment—including the availability of cash dis-

counts—and to understand the commonly used

payment terms.

Netmeans that payment for the face value of the

invoice is due immediately. These terms are sometimes changed to net 10 or net

30 —which means payment is due within 10 or 30 days of the date on the invoice.

Cash discountsare reductions in price to encourage buyers to pay their bills

quickly. The terms for a cash discount usually modify the net terms.

2/10, net 30means the buyer can take a 2 percent discount off the face value of

the invoice if the invoice is paid within 10 days. Otherwise, the full face value is

due within 30 days. And it usually is stated or understood that an interest charge

will be added after the 30-day free-credit period.

Smart buyers carefully evaluate cash discounts. A discount of 2/10, net 30 may

not look like much at first. But the buyer earns a 2 percent discount for paying the

invoice just 20 days sooner than it should be paid anyway. By not taking the dis-

count, the company in effect is borrowing at an annual rate of 36 percent. That is,

assuming a 360-day year and dividing by 20 days, there are 18 periods during which

the company could earn 2 percent—and 18 times 2 equals 36 percent a year.

Credit sales are also important to retailers. Some stores have their own credit sys-

tems. But most retailers use credit card services, such as Visa or MasterCard. The

Why cash discounts

are given and should

be evaluated

Payment terms and

cash discounts set

payment dates

INVOICE NO.ORDER NO. INVOICE DATE 4238

DATE SHIPPED^179642 1/1/200x SHIPPED VIA1/8/200xTruck

00 34100 0600

FOB

Lansing, MI

TERMS

2/10 net 30

WT.

300

NO. PCS

5

Cargill uses a seasonal discount

to encourage its customers to

stock products earlier than

present demand requires. China’s

Coolbid.com used a quantity

discount to launch its shopping

site; the greater the number of

people who applied to buy a

product, the more the price was

discounted.

Consumers say

“charge it”