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 503

Rebates give the producer a way to be certain that final consumers actually get

the price reduction. If the rebate amount were just taken off the price charged mid-

dlemen, they might not pass the savings along to consumers. In addition, many

consumers buy because the price looks lower with the rebate—but then they don’t

request the refund.^21

List Price May Depend on Geographic Pricing Policies

Retail list prices sometimes include free delivery. Or free delivery may be offered

to some customers as an aid to closing the sale. But deciding who pays the freight

charge is more important on sales to business customers than to final consumers

because more money is involved. Usually purchase orders specify place, time,

method of delivery, freight costs, insurance, handling, and other charges. There are

many possible variations for an imaginative marketing manager, and some special-

ized terms have developed.

A commonly used transportation term is F.O.B.—which means free on board

some vehicle at some place. Typically, F.O.B. pricing names the place—often the

location of the seller’s factory or warehouse—as in F.O.B. Taiwan or F.O.B. mill.

This means that the seller pays the cost of loading the products onto some vehicle,

then title to the products passes to the buyer. The buyer pays the freight and takes

responsibility for damage in transit.

If a firm wants to pay the freight for the convenience of customers, it can use F.O.B.

delivered or F.O.B. buyer’s factory. In this case, title does not pass until the products

are delivered. If the seller wants title to pass immediately but is willing to prepay freight

(and then include it in the invoice), F.O.B. seller’s factory-freight prepaid can be used.

F.O.B. shipping point pricing simplifies the seller’s pricing—but it may narrow the

market. Since the delivered cost varies depending on the buyer’s location, a customer

located farther from the seller must pay more and might buy from closer suppliers.

Zone pricingmeans making an average freight charge to all buyers within spe-

cific geographic areas. The seller pays the actual freight charges and bills each

customer for an average charge. For example, a company in Canada might divide

the United States into seven zones, then bill all customers in the same zone the

same amount for freight even though actual shipping costs might vary.

Zone pricing reduces the wide variation in delivered prices that results from an

F.O.B. shipping point pricing policy. It also simplifies transportation charges.

Uniform delivered pricingmeans making an average freight charge to all buyers.

It is a kind of zone pricing—an entire country may be considered as one zone—that

includes the average cost of delivery in the price. Uniform delivered pricing is most

often used when (1) transportation costs are relatively low and (2) the seller wishes

to sell in all geographic areas at one price—perhaps a nationally advertised price.

When all firms in an industry use F.O.B. shipping point pricing, a firm usually com-

petes well near its shipping point but not farther away. As sales reps look for business

farther away, delivered prices rise and the firm finds itself priced out of the market.

This problem can be reduced with freight-absorption pricing—which means

absorbing freight cost so that a firm’s delivered price meets the nearest competitor’s.

This amounts to cutting list price to appeal to new market segments. Some firms

look at international markets this way; they just figure that any profit from export

sales is a bonus.

F.O.B. pricing is easy

Zone pricing smooths

delivered prices

Uniform delivered

pricing—one

pricetoall

Freight-absorption

pricing—competing on

equal grounds in

another territory