The Application allows you to configure five separate price brackets for each inventory item. A customer is then assigned to a price bracket and charged the price calculated for that bracket (Figure 1).

The prices allocated to the price brackets can be based on a percentage or dollar markup over the cost of the inventory item, or they can be set as a fixed dollar amount. In the example above, an inventory item has been set up with five price brackets, each based on a percentage markup over cost. Price 3 in the Price Brackets section is set to calculate the price at cost plus 28%. We also see a customer, Lorena’s Taquería, which has been set up with the Default Pricing Type set to Price 3, thus Lorena’s Taquería will be charged cost plus 28% if they purchase this inventory item (unless the price has been overridden by another pricing mechanism, as will be discussed below). The two forms displayed in Figure 1, the Inventory File Maintenance form and the Customer File Maintenance form, will be examined in detail in Section II.

Some important properties of the price bracket mechanism can be better illustrated with the abstract diagrams depicted in Figures 2 and 3:

As both Figure 1 and Figures 2 demonstrate, the price bracket mechanism must be implemented by creating one or more price brackets in the inventory item file, and then referencing one of those price brackets in the customer file. Each inventory item can have five different price brackets, but each customer file can only reference one price bracket. Figures 2 illustrates the need for some consistency throughout the inventory files as to the use of the five price brackets, as assigning a customer to a price bracket means that customer will be charged the price calculated in that bracket for every inventory item sold to that customer (unless the price bracket mechanism is overridden for a particular inventory item by other pricing options we will look at later). To further illustrate with examples, let’s assume two inventory items using the price bracket mechanism, one using a percentage markup over cost and the other using a dollar markup over cost.

If we examine Figure 3, other aspects of the price bracket mechanism become clear. For instance, you can see that one inventory item file might be set up such that the price in Price Bracket 1 is based on a percentage markup over cost, whereas another inventory item file might calculate the price in Price Bracket 1 based on a fixed dollar markup over cost. So a customer assigned to Price Bracket 1 will be purchasing some items based on a percentage markup, and some based on a fixed dollar markup.

Once a price bracket has been chosen from among the five available for a given customer, any item sold to that customer will be sold according to the price calculated in that price bracket. In our example above, Lorena’s Taquería has been assigned to Price Bracket 3. This means Lorena can buy ground white chocolate at cost plus 28% and eggs at cost plus $17.50. If you wanted to charge her less for eggs – say, the same price charged to Xiaoli’s Chinese Buffet – you would not be able to do it using the price bracket mechanism without also charging her less for white chocolate. The customer is assigned only one price bracket, and every item purchased by that customer is purchased at the price calculated for that item in that price bracket (again, unless it is overridden by another pricing mechanism). In the example, the price brackets for both inventory items are set up in such a way that the best price is available to those customers in Price Bracket 1, the next best price is in Price Bracket 2, etc. Xiaoli is getting a better deal on both items than Lorena. This may be because Xiaoli buys more on average than Lorena, or because she drives a harder bargain than Lorena, or because she simply has a longer and friendlier relationship with her foodservice distributor. Whatever the reason, the brackets here are structured so that moving to a lower-numbered bracket means a better price. Using the price brackets this way essentially categorizes your customers according to a pricing hierarchy, and this should only be done if it makes sense in terms of the marketing plan. If the pattern described holds true for all inventory items, then Xiaoli is getting the best deal on purchases from the distributor. Lorena's Taquería can be moved up the hierarchy by changing the price bracket to which she belongs to one of the lower-numbered brackets. But when such a change is made, it affects her price for all inventory items she purchases based on the price bracket.

So the important thing to remember when setting up and using price brackets is that you are essentially creating categories of customers. The categories you create need to make sense and need to be understood before you start assigning price-calculation methods to the price brackets in the inventory item files.

Another thing to remember is that, in addition to the dollar and percentage markup over cost methods illustrated in Figure 3 above, you can assign a fixed dollar amount to each price bracket that makes no reference to the cost of the item.

SUMMARY OF PRICING USING PRICE BRACKETS

Every inventory item file allows you to define five price brackets for that item based on

1. A percentage markup over cost,
2. a dollar markup over cost, or
3. a fixed dollar amount that makes no reference to cost

Every customer file allows you to assign that customer to one of these five brackets. Each customer can only be assigned to one price bracket.

How it is implemented: The five price brackets for each inventory item are configured using the Pricing Information tab of the Inventory File Maintenance form discussed in Section II G. Any customer can then be assigned to one of the five price brackets using the Pricing tab on the Customer File Maintenance form discussed in Section II J.

Advantages: Allows five different prices to be defined at the inventory item level and these prices can be configured to fluctuate with changes in the cost of the item. Allows the pricing structure for all products a given customer purchases to be changed by changing one field – the price bracket to which the customer is assigned. Facilitates a marketing plan that requires customers to be categorized according to a hierarchical price structure.

Disadvantages: Only one pricing method (percentage markup, dollar markup, or fixed dollar amount) can be used for the five price brackets for any given inventory item. Does not allow a change in the price a given customer is paying for one inventory item without changing the pricing for all inventory items for which pricing is based on price brackets.

Pricing: The Essential Starting Point

TOC

Pricing Using the Cost-Plus Option