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0 10-July-2020

Study Guide in PROFESSIONAL SALESMANHIP (PROF 107) Module No._6_

STUDY GUIDE FOR MODULE NO. ___ 6

Chapter 6: Prices, Discount, Credit Policies and

Practices
MODULE OVERVIEW

 Factors to Consider in Making Pricing Decisions

 Factors Involved in Setting the Retail Price
 Types of Discounts
 Credits: Its Policies and Practices
 Four Types of Open-Charge Accounts
 Information About Credit Applicants

MODULE LEARNING OBJECTIVES

At the end of the lesson, the students can:

 Enumerate the factors to consider in making pricing decisions;

 Understand the factors involved in setting the retail price;
 Analyze the types of discounts;
 Understand credits; its policies and practices;
 Enumerate the four types of open-charge accounts; and
 Understand the information about credit applicants.

LEARNING CONTENTS

Introduction:

Every business enterprise aims to get the highest possible volume of sales and of course, profit.
These objectives guide and influence many marketing and non-marketing decisions, because selling of more
units can bring both short-term and long term benefits to a firm. These objective could be realized through the
proper balance of all the components of the marketing mix namely good product design, attractive packaging,
effective advertising, and impressive selling system among others. Price also determines the volume of sales
of a particular product. On the other hand, consumers want to get products of superior quality at the lowest
price possible. Price is a major consideration in the choice of a product by most of the consumers nowadays
because of economic difficulty. More recently, because of worldwide inflation, price increasingly attracted
considerable attention and is now viewed by many marketers as the most important element in the marketing
mix next to quality of the product quality.

Price. Price is the value of a thing or service expressed in terms of money. Price as simple marketing
terms may speak of the whole amount of money paid for a quantum of goods. Furthermore, price is not a
quality of money but as a ratio between a quantity of money and a quality of goods. It is the only element in
the marketing mix that creates sales revenue; the other elements are costs.

Commodity prices are not the only prices with which marketers should be concerned of. Securities
such as bonds or debentures, stocks or shares and bills or notes have their prices. Foreign exchange rates
express the price of current funds in one market in terms of current funds in another market. Transportation
services have their prices, which we call fares. Wages may be regarded as the price of labor, rent is the price
of the use of land or other durable goods, interest may then be considered as the price of advances of money.

What prices are not?

Profits are not prices because they are not proportioned in any definite way to the amounts of goods
and services supplied, but are contingent upon the success of particular undertakings. The same through in
taxes. It cannot be considered prices because the governmental services for which taxes collected are used,
are diffused and not apportioned to different taxpayers in accordance with their respective payments or

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contributions. Not even fees which are paid to government offices for licenses or for amount of fee is usually
proportioned loosely, if at all, the government. Profit and price are distinct from each other but work closely
together, in a way that ideally, prices are set to operate and make profit, and profit is realized depending upon
on how the prices are accepted by the buying public.

Factors to Consider in Making Pricing Decisions

1. Consistency. Prices of commodities or services should be consistent with the rest of the operations of
the establishment. Relatively higher prices should be accompanied with convenience, and or services
that will make those prices acceptable to the target consumers. On the other hand, lower prices do
not manifest poor service all the times.
2. Long-run point of view. What businessman should maintain is the long-run point of view in pricing. He
may offer goods and services at very low prices for the first few months, which is termed as market-
penetration pricing in order to establish rapport and goodwill, which may attract sufficient maximum
profit in the future.
3. Price-level and maximum profits. Higher prices do not always bring about maximum profits and
conversely lower prices do not ensure loss. Profit result from the relationship among sales, prices,
costs of goods sold, and operational expenses. More often, these factors will indicate maximum
profits with prices higher than those now being charged. But they may also indicate that profits will
decrease if prices are reduced, considering that operational expenses may still be the same.
4. Pricing as an art. Setting price should also be artistic in its own right. Price policies provide a basis for
price decisions, but the use of judgement, intuition, and trial and error to adjust the set-prices would
be deemed advisable. Consumers’ possible reactions should be put first in every pricing endeavor.
Sometimes raising prices make a good unsalable because the consumer’s mind has been
conditioned to a certain price, while in other instances, lowering the prices may also affect the
saleability because the same customer may think the quality has gone down.
 Basic Pricing Decisions. Retailers make a number of fundamental decisions about their
general pricing policies and practices. The most basic one concerns with the relationships
between their prices and those of their competitors.
 Competitors’ Prices. Normally businessmen set their prices at almost the same level
as their major rival. Three possible decisions available.
 Pricing below competitor’s level. Many business owners set their prices below their
competitors’ level to attract a large number of customers and thereby large volume of
sales leading to a rise in their customers’ standard of living, and consequently, an
advance in the firm’s profits.
 Pricing above competitors’ level. It create an image of superiority and prestige.
 Pricing at about same level as competitors’ level . Seems to be the safest provided
that the services are also comparable or even better than that of their competitors.
 One-Price Policy. In the Philippines, one-price policy or fixed price is charging the same price
for everyone who buys the same items has been practiced long time ago. This practice is
more evident in supermarkets and departments stores. Although there are some cases where
stores charge higher prices to customers who purchase in credit.
 The particular policy builds up customer confidence in the store since the customer
would never feel he is discriminated, worst – exploited. The one-price helps stabilize sales
transactions, and thus permits large-scale and broadened retail operations.
 Variable-Price Policy. The price paid by a customer at a given time for a certain item is
determined by bargaining process between the customer and the salesperson. The
customers may pay lower or higher prices for the merchandise, depending upon on how
adept they are at bargaining. This kind of policy is usually used by some smaller, single-line
stores like automobile centers where trade-in allowances are involved. This practice is in
consonant with the Filipino habit of making tawad. According to a study, the tawad system is
a national habit among Filipinos.
 Leader-Pricing. Some retailers price certain products (called leader) just above their delivered
cost price. A “loss” leader is an article that is actually sold for less than its cost, including its
customers are in the store, they will purchase other items, thus making up for the loss. Some
store owners believe leaders create impression that all their prices are low.
 Unit-Pricing. Unit-pricing is a relatively new concept in retailing. It applies to items that are
sold by solid or liquid measure. Examples are soft drinks, detergents, and shampoos. Unit-
pricing enables the shoppers to quickly determine the price for a particular quantity.

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 Price-Lining. Customers continuously crave for a wide-assortment of goods when buying. In

line with this price-lining which consists of selecting certain prices and carrying assortments of
merchandise only at these prices, was introduced. The policy helps salespersons to master
their merchandise prices and enable them to commit few mistakes. This facilitates improved
selling system and builds consumer’s goodwill. Price lining may also reduce the size of a
store’s inventory, increase sales, decrease mark-downs, simplify the stock management and
control, and reduce other maintenance costs. It is worth-noting that this policy brings the
customers into the position to buy the things they want at the price they can afford.
 Discounts. In general usage, a discount is a deduction from the price of an article or service
offered to the buyer for a) paying cash, b) buying large quantities, and c) for some other
reasons (some stores extend discount courtesy to their employees and to certain type of
customers to keep their trade).Discount store movement began in the 1930’s in the United
States, while in the Philippines, it came a little bit later. Early discount stores were
distinguished from other stores both because of the low prices of their merchandise and by
the minimal amount of customer conveniences they offered. Sales were strictly for cash and
stock was limited. They could afford to offer merchandise at reduced prices because their
operating costs were also low. But despite of this, discount stores have become increasingly
popular with customers that prompted early retailers to add credit and delivery services that
brought their business at their respective peaks. In our country today, you could hardly find a
single department store that does not offer merchandise at discount prices, even from the
most prestigious to the least frequented ones, simply because they see potentials in this
practice. It apparently demonstrates that many customers are after obtaining goods at lower
prices rather than having excellent services to go with an important high priced-commodity.

Factors Involved in Setting the Retail Price

1. Customary price. Through the years customers have made up their mind that they are willing to pay a
certain amount for a particular item. For instance, they have conditioned their minds that they will pay fifty
centavos for a piece of candy. If the price of that candy is increased to fifty centavos, the customers develop
some kind of resistance to buy because of the change in price. The same is true for some items which are
sold for a certain price and then reduced. The customers also develop the same resistance with the thought
that the quality of the products has also been reduced. Unless merchandise can be marked at a price that will
appeal to the customers and the result in sales, the opportunity of making a reasonable profit is nil. The cost
of the merchandise to the store and the expenses involved in selling mean little to the average customer. He
wants merchandise that will meet his needs and satisfy his wants at a price he can afford to pay.
2. Appearance of the goods. Another equally important factor in price setting is the appearance of the goods.
For instance, in the case of fruits and vegetables, the appearance will tell whether there is a quality of
freshness or not.
3. Competition. Competition is another factor to be considered in pricing. It provides important influence in
setting retail prices. Staple merchandise is subjected to keener competition than that of style goods. Most of
the retail customers make comparison shopping before deciding to buy a certain item or to patronize a
particular store. Many stores have different ways of meeting competition, which force the retailer to always be
on guard. To cite a few, some retailers resort to lowering their prices, giving free samples, and special
conditions in sales or payment.
4. Season of the year. The season of the year dictates the price of some items, when a product is in season
and there is an abundant supply, the tendency for the price is to go down. However, in case of style or fashion
item that is in demand early in the season, the style merchandise commands a higher price than later in the
season when the peak of demand has passed.
5. Price lines of the store. Many stores have predetermined prices established for various kinds of goods.
Establishment of certain prices reduces the amount of stock to carry in order to maintain proper assortment.
For instance, a certain store established its price line for children’s dresses such as P120.95, P130.95, and
P150.95. Then, the retailer’s prices are pegged to these price lines.
6. Mark-up needed to make profit. The mark-up is needed to ensure the viability of the business. It should
always be remembered that business exists for profit and of course, for its social responsibility to the public.
Mark-up is basically the difference between the cost price and the retail price of the good. There are five types
of mark-ups:
a. Individual mark-up. It is called an individual mark-up because it is the difference between the cost and the
retail price of a single item. For instance, if the cost of an item is P10.00 and the retail or selling price is
P15.00, then the mark-up is P5.00.

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b. Inventory mark-up. The term is used when the mark-up is based on the total inventory or amount of goods
on hand in a certain department. Say, the children’s department, the inventory mark-up is 48%. The mark-up
is based on a number of items, rather than on one individual item.
c. Initial mark-up. It is the difference between cost and the first original price of the merchandise, regardless of
whether or not it is sold at that price. Suppose the retailer plans to sell the item for P150 which he got
P100.00. After two weeks the merchandise is still not sold, so the retailer lowers the price to P120.00, after
which the merchandise is sold. In this case, the initial mark-up is P50, but the maintained mark-up is P20.00.
A maintained mark-up is the difference between the cost price and the actual selling price.
d. Another variation of mark-up is the gross margin. It is the difference between net sales and the total
merchandise costs.
e. Another type of mark-up is called additional mark-up. This is the difference between the original retail price
and the actual retail price after adjustment has been made. For example, an item costing P10.00 may be
marked to sell for P15.00, however, after the merchandise is marked and stocked, it may be necessary to
reprice it for P17.50 to enable the retailers to realize a reasonable profit after the devaluation. The additional
two pesos and seven-five centavos is called additional mark-up. This type of mark-up given to assure the
retailer a reasonable profit.

Types of Discounts

 Cash Discount – is the amount that the seller allows buyers to deduct from the bill if paid within a
certain time.
 Seasonal Discount – is a reduction in price given to those who buy before the usual selling season.
 Trade Discount – is a reduction in price given to a certain class of buyers.
 Quantity Discount – is a reduction in price given to retailers who buy in large quantities.

Credits: Its Policies and Practices

Credit. It is the extension and acceptance of a promise to pay in the future. It is granted in exchange
for goods, services, money or another debt given in the present Credit supplements money in the economy,
and makes possible the sale of goods or services without the immediate payment of money by the buyers.
There are two kinds of credit that are vital to retailers, namely: the COMMERCIAL or TRADE
CREDIT, which is extended by manufacturers and wholesalers to the merchants who buy from them, and the
CONSUMER CREDIT which is used by an individual customer to obtain merchandise or services for which he
agrees to pay at a later time.

 Why consumers use credit. Credit has become popular because it appeals to the consumers for
several reasons:
 Convenience
 Immediate use of high-priced items
 Possible savings
 Preservation of saving
 Income tax purposes

 Reasons why retailers offer credit.

 Credit creates customer loyalty
 Credit customers may be less-price conscious
 Credit customers buy more freely
 Credit may attract preferred trade
 Credit builds goodwill
 Credit helps smooth out business peaks

Four Types of Open-Charge Accounts

1. Regular Accounts, or 30-day account – requires the customer to pay the full balance of the account at
the end of the month or within 30 days. However, the account remains open for future purposes.
Usually, stores set a limit on the amount a customer can charge, and there is no interest charged on
regular accounts.
2. 90-Day charge accounts – is offered for large purchases such as appliances, furniture or to some
extent clothing. The purchaser need not pay the full amount at one time. He may pay one-third charge
extra amount for this account but others may charge a percentage of the unpaid balance or a fixed

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amount depending on the balance still unpaid. A variation of this type is now famous 60-day charge
account.
3. Revolving charge account – enables customers to charge all purchases up to the credit limit and pay
only part of the total amount due at the end of the month. Once the limit has been reached, no more
can be charged until a payment is made.
4. Installment credit – is the second major type of credit offered by retailers. It is selling of consumer
goods basically on credit with a provision for regular periodic payments, say, semi-monthly, etc. after
an initial down payment. Instalment credit differs from charge account credit in four ways:

 The buyer must usually sign a contract agreeing to pay for the purchases;
 A down payment, a certain percentage of the total price, is required;
 Interest and usually a carrying charge paid by the customers; and
 Periodic payments must be made until the goods are paid for.

Information about Credit Applicants

The three C’s of credit:

 Character – is the most important of the 3 C’s. It has to do with the individual’s sense of responsibility
in meeting his financial obligations.
 Capacity – usually refers to the person’s ability to earn money.
 Capital – refers to the wealth of the applicant.

LEARNING ACTIVITY 1

Questions:

1. What is meant by price, discount, and credit?

2. What factors should be considered in pricing?
3. What are different pricing policies?
4. Explain the three C’s in credit granting. Which do you think is more important?

SUMMARY

The company’s prices, discounts, credit policies and practices are all aimed in providing the firms the
greatest benefits from its operations and at the same time giving the customer the best possible services in
order to maximize their satisfaction out of the purchase of the products or services.

REFERENCES

Collier’s Encyclopedia, Vol. VII p.424, 1970

Duncan, Delbert J, Charles F. Phillips, and Stanly C Hollander
Modern Retailing Management, 8th Ed, Richard D. Irwin, Inc, 1972.

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