In times of recession or slower sales, many manufacturers resort to price-cutting tactics which appear to leave the price level intact, but which actually result in price cuts of varying magnitudes and importance. One way is to extend credit. The practice of offering goods with no down payment and three years to pay is a familiar one. Another way is to give advertising allowances, without demanding full service or proof of such service. Still another is the so-called split shipment. The buyer buys a carload, and gets the carload price, but he receives the shipment in several smaller lots.
This does not exhaust the methods of cutting price without reducing the list price. Some manufacturers (especially in certain textile lines) offer seconds. The merchandise is actually first-class or first-line merchandise, but it is sold as seconds at a lower price. In other cases, the manufacturer may offer so-called tie-in sales. The first item is sold at the regular price. The second item (or another product tied-in to the sale) is sold at a reduction. Some sellers resort to split commissions. The commission merchant, broker, or exporter agrees to split commissions with the buyer. Although generally illegal, this type of behind-the-scenes price cutting is difficult to detect.
The reader should not confuse any of the above activities with legitimate price reductions, concessions, and allowances given to all buyers under similar circumstances. When openly offered and available on proportionately equal terms, these price concessions are legal. They are often offered to induce either large- quantity buying, greater dealer support, or more effective distribution on the part of the middleman buyer. Administered pricing. In recent years, much has been heard of so-called administered pricing practices of business. The term applies to the practice of pricing merchandise for the market, not on the basis of cost, competitive pressures, or on the laws of supply and demand, but purely on the basis of policy decisions of the sellers. In theory, this would mean that the seller would virtually disregard all other considerations except his own desire for maximum profits.
Actually, it is impossible in the market today to price merchandise on any such basis. There are forces beyond the control of the manufacturer which influence his pricing policies. There are also certain factors which make for price inflexibility, such as monopoly or near monopoly, price leadership, laws permitting price set¬ting, and the like. In the end, however, every manufacturer must select that price which will make it possible for him to stay in business, meet competition, and satisfy the consumer. To this extent, virtually every price is administered. To the extent that management makes conscious pricing decisions of its own, we can say that we have administered prices.
We must always remember, however, that price is a creature of the market and no seller can disregard actual market conditions. Supply and demand will always influence price. So will competitive activity. So will a manufacturer's costs, his promotional activities, and his policies. So will consumer reaction. The manufacturer has to consider all these forces and seek, in the light of these pressures, to attain price stability at a level where he attains the best combination of results.The price at which goods are sold determines the amount of the seller's income. For this reason, it is a top- management responsibility to price goods correctly. In many companies, pricing responsibility is reserved for the highest company officials. In others, the marketing director has the responsibility, sometimes to recommend, sometimes to set price.
There is a growing tendency in business today to have the top marketing officials participate in price making, even in those instances when actual pricing is a top-management function. It should be kept in mind, however, that pricing is a responsibility which most top executives do not feel can or should be delegated. Too much depends upon correct pricing. Income and even survival are at stake.
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