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Extension pricing is a strategy where companies set a basic price across the board for a product or service. Wherever consumers go, the price will be the same. It covers virtually all costs associated with production, including shipping, taxes, and other expenses that may arise. This pricing strategy is one among several options companies can use when they decide on pricing strategies. It has some advantages as well as drawbacks to consider.
The practice has a long and established history. Consumers may be familiar with some products which are always priced identically, no matter where they buy them. These companies have an extension pricing policy, and typically require all their business partners to abide by the strategy. If one business attempts to undercut or mark up, it may lose the right to sell the product. This creates an obvious incentive to abide by the policy.
Companies use several metrics when establishing extension pricing. They think about the costs of production, along with expenses associated with packaging, inspecting, and shipping. In considering these factors, they need to think about remote distribution locations, because these can add to the costs of shipping. The goal is to generate a roughly equalized price that will balance these expenses out in the final retail price of the item to allow retailers to make good on their costs and generate a profit.
With an understanding of the expenses, the company sets an extension price, the cost it wants customers to pay at the final end of the distribution chain. This allows them to determine wholesale prices, which subtract a standardized retail markup with some leeway for shipping costs. Companies with specific pricing agreements may periodically inspect price lists and audit stores to confirm that they are complying with the agreement. The consequences for violations can depend on the contract language.
For consumers, this has a clear advantage, because they can buy a product anywhere and be assured of the same price. Businesses do not always fare as well under extension pricing. They may not be able to use these products in promotions and sales, for example, and may be stuck with stock they cannot sell. Demand for the product usually requires retailers to carry it, and they may use various sales products to increase revenues, using it as an anchor to draw customers in. If a store carries mattresses with extension pricing, for example, it could sell sheets and accessories to boost income.