As a company’s goals and mission statements change and develop over time, products evolve through their life cycle, and external market forces create new treats and opportunities, the price of a particular product must change.
Although there are legal limitations to how flexible prices may be, price flexibility is still possible. There are generally 4 ways:
Cash discounts offer a different price depending upon whether the customer pays by cash or credit. Cash discounts allow a business to quickly liquidate stock, minimize collection costs, and reduce losses incurred due to consumer’s bad credit.
This allows manufacturers to offer discounts to wholesalers and retailers for promoting specific products.
For example, citrus growers may offer a discounted (or free) crate of oranges for every 4 ordered. Or the same grower may pay a small fee to a retailer who aggressively promotes their product.
One potential problem with this type of discount is known as Forward Buying. This is when buyers “stock up” on an item to take advantage of the current price for as long as possible. Forward buying can adversely affect demand in the long run, so most suppliers will only offer this type of discount for a limited time.
“The more you buy, the more you save”. A volume discount offers a sliding price scale based on the size of the order.
For example, say oranges are $0.25 each. If they are $0.25 each, or 5 for $1.00, then a volume discount is in place.
Other examples of volume discounts are frequent flyer miles, or American Express Rewards.
A geographic discount is a discount offered to residents of a specific geographic location. The discount is usually tied directly to the cost of delivery from the factory to the sales floor.
For example, if Toyota imports cars via Long Beach or the Port of Los Angeles, then dealerships closer to LA can get a better price than those closer to Denver. The retail price will then fluctuate accordingly.
Prohibits price discrimination and inappropriately low prices that can injure or eliminate competition.
Sherman Antitrust Act
Prohibits companies from joining forces to control prices within an industry.
Prohibits so-called “deceptive” pricing.
Permit manufacturers to set minimum prices for their products. Retailers must adhere to these decisions.
The laws / rules / guidelines are in place to protect consumers. Some of these laws / rules / guidelines were taught to us as children so that we could get along with our peers. Generally, we want to avoid dishonesty in our advertising. Lying is “foul ball” legally, and ethically.
Practices that attempt to give one company an unfair advantage in a particular market, such Predatory Pricing, are also generally forbidden.
Unfortunately, it is often difficult to discern a company’s motives based on their pricing strategy. For example, if Wal Mart opens a new store in a small town, it is very likely that due to the sheer size of the Wal Mart, they will be able to offer much lower prices than small local businesses.
If those businesses are forced out of business, is Wal Mart guilty of predatory pricing?
If a large airline drops fares along a commuter route and forces a smaller airline into bankruptcy, is that predatory pricing?
If the prices that were so low when competition existed suddenly “skyrocket”, it is possible that the bigger company was tapping resources outside of the local market to cover losses incurred by the branch in question. Now that company has to recover those losses and become profitable. They have “unfairly” manipulated the prices to their own ends and are subject to litigation.