Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Pricing and Credit Strategies

Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 11Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Pricing and Credit

Strategies

Economic conditionsEconomic conditions Seasonal Seasonal

fluctuationsfluctuations Customers’ price Customers’ price

sensitivitysensitivity Psychological factorsPsychological factors Credit terms and Credit terms and

purchase discountspurchase discounts Desired imageDesired image

Product or service costsProduct or service costs Customers’ Customers’

characteristicscharacteristics Market forcesMarket forces Competitors’ pricesCompetitors’ prices Sales volumeSales volume Company’s imageCompany’s image Customers Customers

expectationsexpectations

Factors Affecting PriceFactors Affecting Price

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

What determines price?What determines price?

Price CeilingPrice Ceiling ("What will the market bear?") ("What will the market bear?")

Price FloorPrice Floor ("What are the company's costs?") ("What are the company's costs?")

AcceptableAcceptable PricePrice RangeRange

?

?

?

?

?

??

?

?

?

?

Final Price (What is thecompany's desired "image?")

Final Price (What is thecompany's desired "image?")

?



Pricing: Dealing with Pricing: Dealing with Rapidly Rising CostsRapidly Rising Costs Communicate with your customersCommunicate with your customers Include a surchargeInclude a surcharge Eliminate discounts, coupons, or Eliminate discounts, coupons, or

“freebies” “freebies” Focus on efficiencyFocus on efficiency Consider absorbing cost increasesConsider absorbing cost increases Emphasize the value your company Emphasize the value your company

provides to customersprovides to customers Try to lock in prices with suppliersTry to lock in prices with suppliers


Three Pricing Forces: Three Pricing Forces: Image, Competition, and Image, Competition, and ValueValue Price conveys image Price conveys image

Prices send signals to customers Prices send signals to customers about quality and valueabout quality and value

Key is understanding your target Key is understanding your target customerscustomers

When setting prices, business When setting prices, business owners must consider competitors’ owners must consider competitors’ pricesprices Competitors’ locationsCompetitors’ locations Nature of the competing goods Nature of the competing goods


Three Pricing Forces: Three Pricing Forces: Image, Competition, and Image, Competition, and ValueValue When setting prices, business When setting prices, business

owners must consider competitors’ owners must consider competitors’ pricesprices Avoid price wars! Avoid price wars!

Focus on value Focus on value Objective value vs. perceived valueObjective value vs. perceived value Three reference points:Three reference points:

Price paid in the pastPrice paid in the past Prices competitors chargePrices competitors charge Company’s costsCompany’s costs

(Continued)


New Product PricingNew Product Pricing

Three types of productsThree types of products:: Revolutionary productsRevolutionary products transform an transform an

industryindustry Evolutionary productsEvolutionary products make make

improvements to products that are improvements to products that are already on the marketalready on the market

Me-too productsMe-too products are those that allow a are those that allow a company merely to keep up with company merely to keep up with competitors competitors

Pricing flexibility for each type?Pricing flexibility for each type?


Introducing a New Introducing a New ProductProduct

Three GoalsThree Goals:: Get the product acceptedGet the product accepted Maintain market share as Maintain market share as

competition growscompetition grows Earn a profitEarn a profit


Introducing a New Introducing a New ProductProduct

Three StrategiesThree Strategies:: PenetrationPenetration SkimmingSkimming Life cycle pricingLife cycle pricing


Pricing Pricing Established Goods Established Goods and Servicesand Services

Odd pricingOdd pricing Price liningPrice lining Dynamic pricingDynamic pricing Leader pricingLeader pricing



Geographic pricingGeographic pricing Zone pricingZone pricing Uniform delivered pricingUniform delivered pricing F.O.B. sellerF.O.B. seller

Opportunistic pricingOpportunistic pricing Discounts (or Discounts (or

markdowns)markdowns) Multiple pricingMultiple pricing



BundlingBundling Optional product pricingOptional product pricing Captive product pricingCaptive product pricing By-product pricingBy-product pricing

Suggested retail pricesSuggested retail prices Follow-the-leader Follow-the-leader

pricingpricing


Pricing for Pricing for Retailers: MarkupRetailers: Markup

Dollar Markup = Retail Price - Cost of Dollar Markup = Retail Price - Cost of MerchandiseMerchandise

Percentage (of Retail Price) Markup Percentage (of Retail Price) Markup = =

Dollar MarkupDollar MarkupRetail PriceRetail Price

Percentage (of Cost) Markup Percentage (of Cost) Markup = =

Dollar MarkupDollar MarkupCost of UnitCost of Unit

Dollar Markup = Retail Price - Cost of Dollar Markup = Retail Price - Cost of MerchandiseMerchandise

Percentage (of Retail Price) Markup Percentage (of Retail Price) Markup = =

Dollar MarkupDollar MarkupRetail PriceRetail Price

Percentage (of Cost) Markup Percentage (of Cost) Markup = =

Dollar MarkupDollar MarkupCost of UnitCost of Unit

Example:Example:

Dollar Markup = $25 - $15 = $10Dollar Markup = $25 - $15 = $10

Percentage (of Retail Price) Percentage (of Retail Price) Markup = Markup =

$10$10$25$25

= 40%= 40%

Percentage (of Cost) Percentage (of Cost) Markup = Markup =

$10$10$1$1

55

= 67%= 67%

Pricing for Retailers: Pricing for Retailers: MarkupMarkup


Pricing for Pricing for Manufacturers: Cost-Manufacturers: Cost-Plus PricingPlus Pricing

Direct LaborDirect Materials

Factory Overhead

Selling and Administrative Costs

Profit Margin

Selling Price



Pricing for Pricing for Manufacturers: Manufacturers: Breakeven Selling PriceBreakeven Selling Price

Breakeven Breakeven SellingSellingPrice Price

QuantityQuantity

== ProfitProfitVariable Variable

cost per cost per unitunit

producedproduced

Total Total fixed fixed costscosts++

{{{{ xx

}}}} ++

Quantity producedQuantity produced

Pricing for Pricing for Manufacturers: Manufacturers: Breakeven Selling PriceBreakeven Selling Price

ExampleExample::


== $0$0 6.98/6.98/unitunit

50,000 unit50,000 unit $110,00$110,0000

++ {{ xx }}++

50,000 units50,000 units

= $9.18 per unit= $9.18 per unit


QuantityQuantity

== ProfitProfitVariable Variable

cost per cost per unitunit

producedproduced

Total Total fixed fixed costscosts++

{{{{ xx

}}}} ++

Quantity producedQuantity produced


Pricing for Service Pricing for Service Firms: Firms: Price per HourPrice per Hour

Price per Hour = Total cost per x 1Price per Hour = Total cost per x 1 productive hour (1 - net profit productive hour (1 - net profit

target astarget as a % of sales)a % of sales)


a % of sales)a % of sales)

Example: Ned’s TV Repair ShopExample: Ned’s TV Repair Shop

Price per Hour = $18.59 per x 1 Price per Hour = $18.59 per x 1 hour (1 -.18)hour (1 -.18)

= $22.68 per = $22.68 per hourhour

Pricing for Service Pricing for Service Firms: Firms: Price per HourPrice per Hour

Price per Hour = Total cost per x 1Price per Hour = Total cost per x 1 productive hour (1 - net profit productive hour (1 - net profit

target astarget as



Consumer CreditConsumer Credit Nearly 144 million Americans Nearly 144 million Americans

have credit cardshave credit cards Average person has 4 credit Average person has 4 credit

cardscards Customers use credit cards to Customers use credit cards to

purchase $1.8 trillion of goods purchase $1.8 trillion of goods annuallyannually

Customers make 30% of personal Customers make 30% of personal consumption expenditures with consumption expenditures with either credit or debit cards either credit or debit cards


Credit and Credit and PricingPricing Merchants incur fees to be Merchants incur fees to be

able to accept credit cardsable to accept credit cards Application feeApplication fee Transaction feesTransaction fees Interchange feesInterchange fees Equipment feeEquipment fee Licensing feeLicensing fee Holdbacks and chargebacksHoldbacks and chargebacks


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Copyright ©2009 Pearson Education, Copyright ©2009 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall

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Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Pricing and Credit Strategies