Agriculture Reference
In-Depth Information
Cash discounts are designed to encourage prompt payment for products and services.
There are an infi nite variety of cash discount programs. Many use terminology such as
“5/10, net 30,” which means that the customer will receive a 5 percent discount if the invoice
is paid within ten days, but the full amount is due in 30 days, regardless. Because of
the tremendous seasonality in most agribusiness industries, cash discount programs are
widely used.
Early-order discounts are often given by manufacturers of agribusiness products as an
incentive to order and/or take possession of products in the off-season. Because of storage
and shipping problems in peak season, many manufacturers aggressively promote early
shipment with very signifi cant price reductions. Crop protection chemical and seed fi rms
make wide use of early-order programs, sometimes offering a host of non-price incentives
to accompany price discounts, such as “one free with each pallet ordered.” Sometimes
price protection programs are included to protect the early buyer against late-season price
reductions by guaranteeing customers that if the price falls later during the heavy-use season,
the buyer will receive a rebate, effectively giving them the lower price.
Loss-leader pricing
Loss-leader pricing
involves offering one or more products in a product mix at a specially
reduced price for a limited time. The idea is to encourage long-term adoption of that particu-
lar product. In a retail store setting, the featured item is also expected to draw customers to
the store and increase sales in all other product lines. Featured items are sometimes even
sold at cost in order to boost store traffi c. Loss leader pricing is common in consumer retail
settings, such as farm-home stores, nurseries, and food stores.
Psychological pricing
Psychological pricing
involves establishing prices that are emotionally satisfying because
they sound lower than some virtually equivalent price. Odd prices, such as 99 cents, sound a
great deal less to customers than $1. “Two for $1.99,” instead of “$1 each,” gives the illusion
of a special deal, and appeals to the customer's instinctive attraction to a bargain.
Prestige pricing
Prestige pricing
, on the other hand, appeals to a high-quality, elite image. Many people
have a strong belief that “you get what you pay for” and tend to equate price and quality on
an emotional basis. Here, even prices—$50 or $100, for instance—are often used to com-
municate a prestige image. Prestige pricing is used in agribusiness, especially by any fi rm
that is pursuing a high income, discriminating consumer. Premium dog food, unique food
items, and quality wines would all be products likely to carry a prestige price.
An example
To illustrate some of the concepts involved in developing a pricing strategy, let's consider
an example. The focus is a manufacturer of agricultural chemicals that is bringing a
new nitrifi cation product, Ni-Tri, to the market. Nitrifi cation products are used with anhy-
drous ammonia to enhance yield and improve dry-down in corn. Farmers look for four
attributes in nitrifi cation products: (1) increased yield; (2) drier corn; (3) easier harvest;
