Small Business Management, 18e Longenecker/Petty/Palich/Hoy Small Business Management, 18e © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pricing and Credit Decisions Chapter 16 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Goals: Discuss the role of cost and demand factors in setting a price. Apply break-even analysis and markup pricing. Identify specific pricing strategies. Explain the benefits of credit, factors that affect credit extension, and types of credit. Describe the activities involved in managing credit. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Setting a Price Price A specification of what a seller requires in exchange for transferring ownership or use of a product or service. Prices set too low, loss in revenue Price set too high, loss in revenue Price and demand are related for many goods and services © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Setting a Price Credit An agreement between a buyer and a seller that provides for delayed payment for a product or service. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cost Determination for Pricing Total Cost The sum of cost of goods sold, selling expenses, and overhead costs. Variable Costs Costs that vary with the quantity produced or sold. Fixed Costs Costs that remain constant as the quantity product or sold varies. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cost Determination for Pricing (cont.) Average Pricing An approach in which total cost for a given period is divided by quantity sold in that period to set a price. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16.1 Cost Structure of a Hypothetical Firm, 2013 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16.2 Cost of Structure of a Hypothetical Firm, 2014 Average pricing overlooks the reality of higher average costs at lower sales levels © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

How Customer Demand Affects Pricing Elasticity of Demand The degree to which a change in price affects the quantity demanded. Elastic Demand Demand that changes significantly when there is a change in the price of the product. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

How Customer Demand Affects Pricing (cont.) Elasticity of Demand (cont.) Inelastic Demand Demand that does not change significantly when there is a change in the price of the product. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pricing and Competitive Advantage Pricing and a Firm’s Competitive Advantage Customers will demand and pay more for a product or service that they perceive as important to their needs. Prestige Pricing Setting a high price to convey an image of high quality or uniqueness (competitive advantage). Customers associate price with quality. Markets with low levels of product knowledge are candidates for prestige pricing. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Applying a Pricing System Break-Even Analysis A comparison of alternative cost and revenue estimates in order to determine the acceptability of each price. Steps in the analysis Examining revenue-cost relationships: the quantity at which the product will generate enough revenue to start earning a profit. Break-even units sold = total fixed costs and expenses selling price – unit variable costs and expenses © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Applying a Pricing System (cont’d) Examining Cost and Revenue Relationships Breakeven point The sales volume at which total sales revenue equals total costs (fixed and variable)—the point at which profitability starts and losses cease. Contribution margin The difference between the unit selling price and the unit variable costs and expenses. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Applying a Pricing System (cont’d) Incorporating Sales Forecasts Adjusted Break-Even Analysis Price has a variable impact and influence on demand. Adjusting for the indirect effect of price allows for a more realistic profit area to be identified. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16.3 Break-Even Graphs for Pricing units © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16.4 A Break-Even Graph Adjusted for Estimated Demand © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Applying a Pricing System (cont’d) Markup Pricing Cost plus pricing system that adds a markup percentage to cover: Operating expenses Subsequent price reductions Desired profit Retail adage: Markup on purchased cost, markdown on selling price © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Selecting a Pricing Strategy Penetration Pricing Skimming Pricing Follow-the-Leader Pricing Pricing Strategies Variable Pricing Dynamic Pricing Price Lining What the Market Will Bear: Adaptive Pricing © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Selecting a Pricing Strategy (cont’d) Setting Prices: Controls and Situations The Sherman Antitrust Act generally prohibits competitors from conspiring to fix prices. The effect of the introduction of new products into an established product line. Offering discounts to match the needs of customers. If the initial price appears to be off target, make any necessary adjustments and keep on selling! © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Offering Credit Benefits of Credit to Borrowers Provides working capital Ability to satisfy immediate needs and pay later Better records of purchases on credit billing Better service and greater convenience when exchanging purchased items Establishment of credit history © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Selling on Credit Factors that Affect Selling on Credit Type of business Credit policies of competitors Income level of customers Availability of working capital Economic conditions © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Credit Consumer Credit Trade Credit Financing granted by retailers to individuals who purchase for personal or family use. Trade Credit Financing provided by a supplier of inventory to a given company which sets up an account payable for the amount. Terms of sale may be 2/10, net 30—two percent discount on the invoiced amount if paid in full within 10 days of the invoice date, otherwise the full invoice amount is due in 30 days. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Consumer Credit Accounts Open Charge Account Is a line of credit that allows the customer to obtain a product at the time of purchase. Installment Account Is a line of credit that requires a down payment, with the balance paid over a specified period of time. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Consumer Credit Accounts (cont.) Revolving Charge Account Is a line of credit on which the customer may charge purchases at any time, up to a pre- established limit. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Credit Cards Bank Credit and Debit Cards Are issued by banks that are widely accepted by retailers who pay a fee to the banks for handling their credit transactions. Travel and Entertainment Credit Cards Were originally used to purchase services, now widely accepted for merchandise. Retailer Credit Cards Are issued by firms for specific use in their retail outlets or for purchasing their products or services. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Managing the Credit Process Evaluation of Credit Applicants Can the buyer pay as promised? Will the buyer pay? If so, when will the buyer pay? If not, can the buyer be forced to pay? © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Managing the Credit Process (cont.) The Traditional Five C’s of Credit Character Capacity Capital Collateral Conditions © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Sources of Credit Information Individuals Customer’s previous credit history Credit information exchanges Businesses Financial statements of the firm Other sellers to the firm Firm’s banker Trade-credit agencies Credit bureaus Online credit data © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16.5 Hypothetical Aging Schedule for Accounts Receivable © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Managing the Credit Process (cont’d) Billing and Collection Procedures Timely notification is a most effective collection method for keeping bills current. Warning consumers that they may do damage to their credit if they fail to pay. Bad Debt Ratio A number obtained by dividing the amount of bad debts by the total amount of credit sales. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Credit Regulation The Truth-in-Lending Act (1968) The Fair Credit Billing Act The Fair Credit Reporting Act The Equal Credit Opportunity Act The Fair Debt Collection Practices Act © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

freemium strategy inelastic demand installment account markup pricing open charge account penetration pricing strategy prestige pricing price price lining strategy price skimming product line pricing revolving charge account trade-credit agencies value variable pricing strategy aging schedule average pricing bad-debt ratio break-even analysis break-even point consumer credit contribution margin credit credit bureaus credit card debit card elastic demand elasticity of demand follow-the-leader pricing strategy © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.