Page 603 - Business Principles and Management

Unit 6
Why might a business offer
a seasonal discount for its
products?
Career tip
Everyone in business must
understand accounting and
costs related to products.
Salespeople cannot sell prod- To make a profit, businesses must plan for discounts when setting their list prices.
ucts if they do not know
these costs. Buyers must
know their costs before they more than cover all costs. The income remaining after deducting costs from the
buy inventory, raw material, selling price is the net profit for that sale.
or supplies. The more you
know about accounting, the
better you will understand
your business career field.
590
than retailers). In this case, the manufacturer expects
the wholesalers to perform additional marketing ac-
tivities beyond those expected from retailers.
A quantity discount is a price reduction offered to
customers that buy in quantities larger than a specified
minimum. For example, a retail paint store that orders
200 gallons of paint from a wholesaler pays a certain
price per gallon. However, the wholesaler may lower
the price per gallon if the store orders at least 1,000
gallons at one time. The purpose of the discount is to
PHOTO: © GETTY IMAGES/PHOTODISC. lower price because that sale reduces the cost of inven-
encourage customers to buy in large quantities. The
manufacturer can afford to sell the larger quantity for a
tory, the amount of storage space needed, the insurance
costs, and the administrative costs of product handling.
Quantity discounts may be based on the number of
units purchased or on the dollar value of the order.
A seasonal discount is a price reduction offered for
ordering or taking delivery of products in advance of
the normal buying period. It encourages the buyer to
purchase earlier than necessary or at a time when
orders are normally low. An example is a discount on snowmobiles purchased in
the summer. The seasonal discount is a way the manufacturer attempts to bal-
ance production and inventory levels throughout the year for products that are
normally purchased at a few specific times during the year.
To encourage early payment, many businesses offer a cash discount. A cash
discount is a price reduction given for paying by a certain date. A cash discount
is usually stated as a percentage of the purchase price (for example, 2 percent).
Businesses offer cash discounts with various dating and credit terms. For example,
the terms of a purchase may be net 30 days with a 2 percent discount for payment
within 10 days. If the invoice is dated May 1, the buyer can deduct 2 percent
from the total price when paying on or before May 11. Otherwise, the buyer
must pay the full amount by May 31. Businesses express terms like these in this
form: 2/10, n/30.
COMPONENTS OF PRICE
The prices businesses charge can make the difference between the success and
failure of their products. Customers must view the product as a good value for
the price. The price must be competitive with prices of competitors’ products,
yet high enough for the business to make a profit on the sale.
The selling price is the actual price customers pay for the product. The selling
price is determined by subtracting any discounts from the list price. Businesses
often set list prices higher than the price at which they end up selling the products.
Figure 22-2 illustrates the components that marketing managers consider
when setting prices. To make a profit, marketers must set prices high enough to
The largest cost that the price must cover is the cost of goods sold. The
cost of goods sold is the cost to produce the product or buy it for resale. For
manufacturers, the cost of goods sold is the total cost of the materials, oper-
ations, and personnel used to make the product. For wholesalers and retailers,