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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
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
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
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
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
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)
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?
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
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
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
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
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
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
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
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
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
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
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
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
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
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