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Part 5: Price Components

Discounts and Premiums

Capsule:The industry might use several different types of discounts or premiums to appeal to specific segments of customers. The discounts usually reflect savings for the industry in serving those segments compared to the average customer. The premiums reflect the industry's higher costs.

Competitors in the industry might change the type of Discounts or Premiums used in order to change the effective price. Virtually every product and service package provides for some form of Discount for specific segments in the market. The most common forms of segment Discounts are those that reward buyers for large volumes of purchases and all customers for prompt payment on invoices. However, there are several other types of Discounts that the industry may use to reduce the basic price offered to specific segments of the market. In some cases, these Discounts might be reversed, as well. With a reversed Discount, a seller would charge a Premium to some segments in the marketplace by using the Discount concept to produce a Premium. Most of these Discounts types reflect savings for the industry in some part of the customer relationships in the segment. Premiums reflect higher costs to serve a customer segment compared to the average customer.

Example of Discount and Premiums: MCI One Plan offers 12 cents per minute if you spend at least $25 a month. Spend less than $25 and the per-minute charge is 15 cents.
Explanation:
MCI offers a form of a volume purchase discount.

For more examples and brainstorming ideas, please see Improve/Pricing/Change Components of Price/Change Type of Discount or Premium

Discounts and Premiums Questions

  • Identify discounts and premiums the industry uses today:

    • Volume: Does the industry use volume Discounts or Premiums?

    • Product Demand: Does the industry offer a Discount or add a Premium according to the demand a product has compared to other products in the market place?

    • Customer Status: Does the industry offer Discounts according to whether the purchaser is a current or potential customer, or alternatively, whether the customer has high or low value to an industry competitor?

    • Transfer Cost: Does the industry transfer part of its typical product package cost to the customer in return for a Discount? Here, the customer himself provides some of the benefits included in the product.

    • High Visibility Product: Does the industry change its Discount or Premium structure on products commanding lesser or greater customer attention?

    • Multiple Products: Does the industry offer Discounts based on the number of separate products the customer buys?

    • Coupon: Does the industry offer some customer segment a Discount based on a coupon distributed to the customer segment?

    • Rebate: Does the industry offer Discounts to some segments of the market based on a rebate offered to those specific segments?

    • Prompt Payment: Does the industry offer customers a Discount that varies with the promptness with which the customer pays the invoice for the product?

  • Have any of these Discounts had an effect on the sales volume of the competitors in the industry who use them?

Basic Strategy Guide Users Return To: Step 23




Summary Points Next: Basis of Charge