Pricing Essay

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Discount and Allowance Pricing Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases, and off-season buying. These price adjustments—called discounts and allowances—can take many forms. A cash discount is a price reduction to buyers who pay their bills promptly. A typical example is "2/10, net 30," which means that although payment is due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10 days. The discount must be granted to all buyers meeting these terms. Such discounts are customary in many industries and help to improve the sellers' cash situation and reduce bad debts and credit-collection costs. A quantity discount is a price reduction to buyers who buy large volumes. A typical example might be "$10 per unit for less than 100 units, $9 per unit for 100 or more units." By law, quantity discounts must be offered equally to all customers and must not exceed the seller's cost savings associated with selling large quantities. These savings include lower selling, inventory, and transportation expenses. Discounts provide an incentive to the customer to buy more from one given seller, rather than from many different sources. A functional discount (also called a trade discount) is offered by the seller to trade channel members who perform certain functions, such as selling, storing, and record keeping. Manufacturers may offer different functional discounts to different trade channels because of the varying services they perform, but manufacturers must offer the same functional discounts within each trade channel. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season. For example, lawn and garden equipment manufacturers offer seasonal discounts to retailers during the fall and winter months to encourage early ordering in

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