The pricing discount is one of the pricing strategies in which the markdown pricing of your merchandise is lowered. The target of the discount pricing strategy is to get maximum customer traffic and clear the old inventory from your business and also increase the sales.
Most of the businesses practice changing the strategies so that they don’t have to depend only on pricing discounts for a long time.
One should be careful while using a pricing discount strategy because if you continuously mark down the price of the product, then you could end up losing a lot of money. Also, if all the products are continually marked down, then the customers will not feel the value of the product.
You cannot always rely on pricing discounts, and larger companies have a lower price on bulk products. This is why it is difficult for smaller businesses to compete with them.
The price of the product is the word to motivate more customers to buy the product, but merely announcing the price drop may not be enough and could also lead to a reverse negative impact on the business. The pricing discount should be introduced at an appropriate time for selected buyers and those who respond quickly.
Pricing discount for New Products
There is not a single discount pricing strategy that works well in every case. The approach to be used depends entirely on the product in question, its relevancy to the market and its sales history.
One of the main reasons for giving a discount is to make the introduction of new products into the market. The strategy is to announce the new product with a discount for a limited time or the limited customers so that the customers respond faster to the lowered price.
Pricing discount for products with declining sales
Sales revival is dependent on pricing discounts. When there is a product which has a good sales history but is suffering from declining sales, then, to beat the competition you can offer a pricing discount on the product. The price drop will increase sales, but it will be dependent on how the pitching is done. There are two ways to do this:
- The 1st way is to admit that we are dropping the price of the product by following our competitors.
- The second approach is when the product is coming to the end of its product cycle. ‘Buy now before it’s gone forever’ is the strategy that can be used to push the sales of the product.
Types of pricing discount
The following are six different types of prices and discounts, which are commonly accompanied by almost every industry.
1. Quantity discount
Economies of scale as the principal commonly used in the concept of quantity discount. If the buyer agrees to buy a higher number of products from the seller, then he may end up getting the quantity discount. The number of units produced will reduce the unit cost of the production or manufacturing, thereby offering a discount to the buyer. The marketing and distribution expenses are also reduced because of the quantity discount.
This discount can be offered for a large quantity of purchase over time or in a single purchase or over the volume purchase, which is measured in rupees or units.
For example, your customer may agree to purchase a bottle of shampoo, which costs $10 a unit for two years every month, and he would get a discount of $2 every unit.
Another customer may agree to buy 25 bottles of shampoo at one time and get a discount of $2.5 per unit.
The quantity orders at one time will encourage a more significant number of sales, but fewer number of requests over a given period.
The advantage to the seller is that he has to process fewer orders and ship and invoice fewer products, thereby reducing the distribution costs since most of the products go to a single customer. These discounts have these benefits, and the discount is dependent on the total volume of purchase for a given period, which could be anywhere between one month to 1 year. However, these discounts do not encourage repeat purchase from the buyer after the discount is over.
The nature of the product may encourage to place small orders, for example, in the case of perishable products or large consumer durables or equipment or machinery.
2. Functional discounts
Functional discounts are also termed as trade discounts. They are provided to the middleman to perform functions in the distribution of commodities of products. This is the reason why trade discounts are also called a functional discount. For example, a bookseller may get some discount from the publisher at the rate of say 20%, 22%, 25% on orders of 5 to 10, 10 to 30, 30 to 100 respectively these discounts are a presentation of a system of graded incentives.
The discounts increase as the orders go up and are not fixed, unlike Quantity discounts.
The trade discounts are given to distributors because they perform multiple functions within the distribution channel. This is why they should be compensated accordingly. For example, some wholesalers provide storage facilities to the manufacturer; they also help to set up displays for the retailer and extend them a credit period as well.
3. Promotional discounts
Promotional discounts are given to the distributors because they promote the product of the manufacturer by unique displays, local advertising, or other promotional materials that are customized. These allowances use a percentage of reduction in the pricing, or they may be outright cash payment either to the distributor or to the promoter.
4. Seasonal discounts
There is always up and down in every business. These periodic fluctuations affect regular activities in business activity. They may affect the market in a significant way and fluctuate to the entire market. To compensate for the losses that occurred during fluctuations, businesses come up with a seasonal discount.
For example, special discounts are offered to people who shop at night instead of peak hour. Heaters in winter and air-conditioners in summer are offered at specials reduced prices in specific months to boost the sales.
The more elastic the demand for the product, the better is the price discount it gets. For example, the morning shows for films, long-distance phone calls in the night, warm clothes in summer, and summer clothes in winter get more discount because the seller may want to finish the stock early.
5. Cash Discount
The cash discount is a reward for the payment of a product within a specified period. Some suppliers will provide a cash discount to all customers who will pay the due amount within the scheduled time.
From the seller’s point of view, immediate payment is always preferable so that the seller can invest the money by buying more products for that period. This is why the seller will prefer and offer discounts on immediate cash payment.
6. Geographical discount
This type of discount structure refers to the different pricing, based on the location of the buyer or the market. They are usually necessary when the transportation cost is much higher than the selling price.
Therefore, the manufacturer can gain from the difference in transportation cost because of the long distance between the location of the customer and the manufacturer. There are different types of geographical discounts, such as the following:
- Uniform Delivery Pricing
- Postage stamp method of pricing
- Zonal method of pricing
- Basal Point pricing
- Full freight equalization
Advantages of Pricing Discount
The primary benefit of pricing discount is for the customers who get the product at reduced prices. Because of the discounting, the customer may come back for repeat purchases, which would increase the sale of your products.
When the customer walks in for the purchase of a discounted product, he may also buy a few other products which are present in your store but not on discount pricing. This means that discount pricing has a cascading effect on other products as well.
Discount pricing is useful if you are not able to exhaust the stock of products. When you offer excellent discounts on the products, it will help to liquidate the inventory in a short time.
Customers who are discount savvy may end up becoming your loyal customers. It will make them feel that they are getting better days than other stores, and they will frequent their purchasing from your store. Apart from that, the customers who receive store credit or loyalty points will also feel valued.
The pricing discount is beneficial to new products in the market. Customers are often skeptical about using new products and a decent pricing discount for first-time buyers will motivate them to buy the products and try them. It will help the latest products to establish their value to the customer. Also penetrating the existing market may take a lot of time and cost a lot of marketing expenses for the company. Instead of offering the product or service on discount pricing will yield immediate results for the company.