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

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

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

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

Pricing and Credit

Strategies

Page 2: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Seasonal Seasonal fluctuationsfluctuations

Customers’ price Customers’ price sensitivitysensitivity

Psychological Psychological factorsfactors

Substitute productsSubstitute products Credit terms and Credit terms and

purchase discountspurchase discounts

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 ©2012 Pearson Education, Inc. publishing as Prentice HallChapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies 11-11-22

Page 3: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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?")

?

Copyright ©2012 Pearson Education, Inc. publishing as Prentice HallChapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies11-11-33

Page 4: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-44

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

Page 5: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-55

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

Page 6: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-66

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)

Page 7: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-77

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?

Page 8: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-88

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

Page 9: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-99

Introducing a New Introducing a New ProductProduct

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

Page 10: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1010

Pricing Pricing Established Goods Established Goods and Servicesand Services

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

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

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1111

Pricing Pricing Established Goods Established Goods and Servicesand Services

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

Page 12: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1212

Pricing Pricing Established Goods Established Goods and Servicesand Services

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

Page 13: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1313

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

Page 14: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1414Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Page 15: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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

Direct LaborDirect Materials

Factory Overhead

Selling and Administrative Costs

Profit Margin

Selling Price

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1515Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Page 16: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1616

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

Page 17: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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

ExampleExample::

Breakeven Breakeven SellingSellingPrice Price

== $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

Breakeven Breakeven SellingSellingPrice Price

QuantityQuantity

== ProfitProfitVariable Variable

cost per cost per unitunit

producedproduced

Total Total fixed fixed costscosts++

{{{{ xx

}}}} ++

Quantity producedQuantity produced

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1717Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Page 18: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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)

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1818Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Page 19: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

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

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-1919Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit Strategies

Page 20: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-2020

Consumer CreditConsumer Credit

Nearly 181 million Americans have Nearly 181 million Americans have credit cardscredit cards

Average person has 4.4 credit cardsAverage person has 4.4 credit cards Customers use credit cards to Customers use credit cards to

purchase $2 trillion of goods purchase $2 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

Page 21: Chapter 11 Pricing and Credit Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 11-1 Pricing and Credit Strategies

Chapter 11 Pricing and Credit StrategiesChapter 11 Pricing and Credit StrategiesCopyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 11-11-2121

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