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Chapter 5

Chapter 5: Pricing Policy Study Guide

Financial Accounting
Course Code
Tarun Dewan

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Chapter 5 Pricing Policy
Pricing policy: policy that determines how a company varies its prices
Consumer purchase behavior is influenced by expectations that the seller has
Ie. People don’t buy a discounted product and wait for it to become even
cheaper. Thus to get people to buy, companies are forced to lower the price
later (which matches with what consumers expected). Companies can set a
pricing policy that offer “30 day price protection” so that consumers can
receive a credit for the difference between the regular and the sale price
within 30 days of purchase. This way more people will buy the discounted
instead of waiting for it to go on sale, and the company will not have to
discount the price further later.
Behavior of sellers is driven by expectations inferred from past experience.
Ie. Sales go up a lot during discount periods, and fall during weeks before
discounting. Thus seller becomes more aggressive in the discounting and
starts the discount a week earlier to take advantage of customers’ increasing
price sensitivity.
Seller’s expectations -> seller’s pricing behavior -> buyer’s
expectations -> buyer’s purchasing behavior -> seller’s expectations…
Conclusion: Instead of reacting to past consumer behavior (tactical pricing), sellers
should act to influence future consumer behavior (strategic pricing).
In b2b, buyers are ahead of sellers because buyers have goals and long-term
strategies for decreasing costs, and buyers can pick different sellers. Buyers also
have full time professionals to negotiate price and they have access to pricing
strategies of different suppliers.
Ideally, policies are transparent, consistent, and enable companies to address
pricing challenges proactively.
Policies for responding to price objections/negotiations
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With a price increase, poorly defined policies leads to lack of price integrity on the
seller’s side, which in turns makes the buyers adopt defensive negotiation tactics.
If no price consistency, consumers will keep looking for substitutes to threaten you
lower your price. Competitors also won’t know your price due to no consistency.
They can only know the info from purchasing agents, who tends to tell them that
you provided a lower price without telling them the restrictive terms so the
purchasing agents can negotiate with them for an even lower price. As a result,
competitors will think you are pricing lower and so they will price even lower than
necessary to win sales.
Benefits of policies for price negotiation
With a price increase, if company has strong pricing policies, seller now has more
control and price integrity over purchasing agents, leaving purchasing agents to
make decisions such as to compromise or check what other companies are doing.
With strong policies (including discount and trade off policies), sales rep has the
power to provide trade offs without consulting his supervisor. Therefore the buyer
now has to make a decision on whether to keep threatening the seller to lower
price, or working with the seller and save money from trade offs/discount policies.
One result is the buyer becomes more open up and forms a mutually beneficial
Conclusion: changes in price should be driven by consistent policies that would
empower and motivate sales reps to sell on value rather than on price.
Policies for different types of buyers
Value buyers: buys a disproportionate share of sales volume
- Have sophisticated purchasing departments that buy large volumes
- Can afford cost to search and evaluate many alternatives
- Try to get all features and services
- Try to push down price as low as possible
Policies: ones that empower sales reps to make trade-offs, and offer defense
against pressure on price alone
- Understand how your product may add more value to customer than
- Understand how change in customers behavior can add more value to you
- Create a set of pre-approved trade-offs
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