Pricing and Credit Strategies Chapter 11 Pricing and

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Pricing and Credit Strategies Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson

Pricing and Credit Strategies Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -1

Factors Affecting Price n n n n Product or service costs Customers’ characteristics Market

Factors Affecting Price n n n n Product or service costs Customers’ characteristics Market forces Competitors’ prices Sales volume Company’s image Customers’ expectations Chapter 11 Pricing and Credit Strategies n n n Seasonal fluctuations Customers’ price sensitivity Psychological factors Substitute products Credit terms and purchase discounts Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -2

What determines price? Price Ceiling ("What will the market bear? ") ? Acceptable Price

What determines price? Price Ceiling ("What will the market bear? ") ? Acceptable Price Range ? ? Final Price (What is the company's desired "image? ") ? ? Price Floor ("What are the company's costs? ") Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -3

Pricing: Dealing with Rapidly Rising Costs n n n n Communicate with your customers

Pricing: Dealing with Rapidly Rising Costs n n n n Communicate with your customers Include a surcharge Eliminate discounts, coupons, or “freebies” Focus on efficiency Consider absorbing cost increases Emphasize the value your company provides to customers Try to lock in prices with suppliers Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -4

Three Pricing Forces: Image, Competition, and Value n Price conveys image Ø Prices send

Three Pricing Forces: Image, Competition, and Value n Price conveys image Ø Prices send signals to customers about quality and value Ø Key is understanding your target customers n When setting prices, business owners must consider competitors’ prices Ø Competitors’ locations Ø Nature of the competing goods Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -5

Three Pricing Forces: Image, Competition, and Value (Continued) n When setting prices, business owners

Three Pricing Forces: Image, Competition, and Value (Continued) n When setting prices, business owners must consider competitors’ prices Ø Avoid n price wars! Focus on value Ø Objective value vs. perceived value Ø Three reference points: n Price paid in the past n Prices competitors charge n Company’s costs Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -6

New Product Pricing Three types of products: n Revolutionary products transform an industry n

New Product Pricing Three types of products: n Revolutionary products transform an industry n Evolutionary products make improvements to products that are already on the market n Me-too products are those that allow a company merely to keep up with competitors Pricing flexibility for each type? Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -7

Introducing a New Product Three Goals: n Get the product accepted n Maintain market

Introducing a New Product Three Goals: n Get the product accepted n Maintain market share as competition grows n Earn a profit Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -8

Introducing a New Product Three Strategies: n Penetration n Skimming n Life cycle pricing

Introducing a New Product Three Strategies: n Penetration n Skimming n Life cycle pricing Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -9

Pricing Established Goods and Services Odd pricing n Price lining n Dynamic pricing n

Pricing Established Goods and Services Odd pricing n Price lining n Dynamic pricing n Leader pricing n Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -10

Pricing Established Goods and Services n Geographic pricing Ø Zone pricing Ø Uniform delivered

Pricing Established Goods and Services n Geographic pricing Ø Zone pricing Ø Uniform delivered pricing Ø F. O. B. seller Opportunistic pricing n Discounts (or markdowns) n Multiple pricing n Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -11

Pricing Established Goods and Services n Bundling Ø Optional product pricing Ø Captive product

Pricing Established Goods and Services n Bundling Ø Optional product pricing Ø Captive product pricing Ø By-product pricing Suggested retail prices n Follow-the-leader pricing n Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -12

Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Percentage

Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Percentage (of Cost) Markup = Dollar Markup Cost of Unit Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -13

Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Dollar

Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Dollar Markup Retail Price Percentage (of Retail Price) Markup = Percentage (of Cost) Markup = Dollar Markup Cost of Unit Example: Dollar Markup = $25 - $15 = $10 Percentage (of Retail Price) Markup = Percentage (of Cost) Markup = Chapter 11 Pricing and Credit Strategies $10 $25 = 40% $10 = 67% $15 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -14

Pricing for Manufacturers: Cost-Plus Pricing Selling Price Profit Margin Selling and Administrative Costs Direct

Pricing for Manufacturers: Cost-Plus Pricing Selling Price Profit Margin Selling and Administrative Costs Direct Labor Direct Materials Factory Overhead Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -15

Pricing for Manufacturers: Breakeven Selling Price Total fixed Breakeven { Variable cost Quantity }

Pricing for Manufacturers: Breakeven Selling Price Total fixed Breakeven { Variable cost Quantity } { per unit x produced } + costs Selling Profit + = Price Quantity produced Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -16

Pricing for Manufacturers: Breakeven Selling Price Total fixed Breakeven { Variable cost Quantity }

Pricing for Manufacturers: Breakeven Selling Price Total fixed Breakeven { Variable cost Quantity } { per unit x produced } + costs Selling Profit + = Price Quantity produced Example: Breakeven Selling = Price $0 + { 6. 98/unit x 50, 000 unit } + $110, 000 50, 000 units = $9. 18 per unit Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -17

Pricing for Service Firms: Price per Hour = Total cost per x 1 productive

Pricing for Service Firms: Price per Hour = Total cost per x 1 productive hour (1 - net profit target as a % of sales) Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -18

Pricing for Service Firms: Price per Hour = Total cost per x 1 productive

Pricing for Service Firms: Price per Hour = Total cost per x 1 productive hour (1 - net profit target as a % of sales) Example: Ned’s TV Repair Shop Price per Hour = $18. 59 per x 1 hour (1 -. 18) Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall = $22. 68 per hour 11 -19

Consumer Credit n n Nearly 181 million Americans have credit cards Average person has

Consumer Credit n n Nearly 181 million Americans have credit cards Average person has 4. 4 credit cards Customers use credit cards to purchase $2 trillion of goods annually Customers make 30% of personal consumption expenditures with either credit or debit cards Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -20

Credit and Pricing n Merchants incur fees to be able to accept credit cards

Credit and Pricing n Merchants incur fees to be able to accept credit cards Ø Application fee Ø Transaction fees Ø Interchange fees Ø Equipment fee Ø Licensing fee Ø Holdbacks and chargebacks Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -21

All rights reserved. No part of this publication may be reproduced, stored in a

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Chapter 11 Pricing and Credit Strategies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 11 -22