Page 602 - Business Principles and Management

Chapter 22 • Pricing and Promotion

22.2 Pricing & Costs

Goals Terms
• Distinguish between various • list price • cost of goods sold
types of discounts and price • discounts • operating expenses
components. • trade discount • margin (gross profit)
• Describe factors involved in estab- • quantity discount • net profit
lishing product prices and com- • seasonal discount • markup
mon pricing strategies.
• cash discount • markdown
• Discuss ways that companies try
to control costs that can lead to • selling price
higher prices.

Payment Terms and Discounts

Businesses establish a price at which they would like to sell a product. The
initial price that the seller posts on a product is its list price. Often, however,
customers do not pay the list price. The terms of sale offered by the seller or
requested by the buyer affect the actual price paid. The terms of sale identify
delivery conditions, when invoices must be paid, and whether the buyer can
receive credit or discounts.
The buyer may specify requirements the seller must meet. The buyer and seller
discuss those requirements and then negotiate any changes before a final decision
is made. The buyer and seller discuss price, quantity, and delivery, and agree on the
terms of the sale. The supplier then receives the buyer’s purchase order or contract,
which details the form, quantity, and price of the products to be supplied.

PAYMENT TERMS
Companies that sell to other businesses often extend credit to their customers.
They list their credit terms on the invoice. Invoices often state credit terms in a
form such as net 30 days, which means that the buyer must pay in full within
30 days from the date on the invoice. Some businesses offer longer payment
terms, such as net 60 days. The longer the term, the better for the buyer, who
then has a chance to sell the goods by the time payment is due or earn interest
on the money that otherwise would be paid to the supplier.

DISCOUNTS

Suppliers may offer discounts on products that their business customers purchase.
Discounts are reductions from a product’s list price designed to encourage cus-
tomers to buy. Common types of discounts are trade, quantity, seasonal, and cash
discounts.
A trade discount is a price reduction that manufacturers give to their channel
partners, such as wholesalers or retailers, in exchange for additional services.
For example, a manufacturer may give retailers a 30 percent discount but may
give wholesalers a 45 percent discount from the list price (or 15 percent more

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