Copyright © 2016 Pearson Education, Inc. 1

Pricing and Credit Strategies Section 3: Launching the Business

 Discuss the relationships among pricing, image, competition, and value.  Describe effective pricing techniques for introducing new products or services and for existing ones.  Explain the pricing methods and strategies for retailers, manufacturers, and service firms.  Describe the impact of credit on pricing Copyright © 2016 Pearson Education, Inc.

 Pricing:  Is governed both by art and science.  Requires balancing a multitude of complex forces.  Influences every aspect of a small company.  Is an important signal of value to customers.  Involves both math and psychology.  Has a greater impact on profits than corresponding increases in unit volume or reductions in costs Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 Companies that take a strategic approach to pricing and monitor its results can raise their sales revenue between 1 and 8%  Example: Duane Reade Copyright © 2016 Pearson Education, Inc.

 Price sends important signals to customers: quality, prestige, uniqueness, etc.  Common small business mistake: charging prices that are too low and failing to recognize extra value, service, quality, and other benefits they offer.  The key is to understand the target market and identify how much customers are willing to pay rather than how much to charge Copyright © 2016 Pearson Education, Inc.

 Must take into account competitors’ prices, but it is not always necessary to match or beat them.  Key is to differentiate a company’s products and services.  Price wars often eradicate companies’ profits and scar an industry for years.  Best strategy: Stay out of a price war! Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 The “right” price for a product or service depends on the value it provides for a customer.  Two aspects of price:  Objective value  Perceived value: determines the price customers are willing to pay.  Value is not synonymous with low price.  Fighter brand Copyright © 2016 Pearson Education, Inc.

 Communicate with customers  Add a surcharge  Focus on improving efficiency  Consider absorbing cost increases  Eliminate discounts, coupons, and freebies  Use cheaper raw materials  Raise prices incrementally and consistently Copyright © 2016 Pearson Education, Inc.

 Modify the product or service to lower its cost  Offer products in smaller sizes or quantities  Differentiate your company and its products and services from the competition  Anticipate rising costs and try to lock in prices of raw materials early  Emphasize the value of your company’s product or service to customers Copyright © 2016 Pearson Education, Inc. (continued)

Copyright © 2016 Pearson Education, Inc.

 Three Goals: 1.Getting the product accepted  Revolutionary products  Evolutionary products  Me-too products 2.Maintaining market share as competition grows 3.Earning a profit Copyright © 2016 Pearson Education, Inc.

 Three basic pricing strategies: 1.Penetration 2.Skimming 3.Life cycle pricing Copyright © 2016 Pearson Education, Inc. (continued)

 Odd pricing  Price lining  Freemium pricing  Dynamic pricing  Leader pricing  Geographic pricing  Discounts (markdowns) Copyright © 2016 Pearson Education, Inc.

 Bundling  Optional-product pricing  Captive-product pricing  By-product pricing  Suggested retail prices  Follow-the-leader pricing Copyright © 2016 Pearson Education, Inc. (continued)

Copyright © 2016 Pearson Education, Inc. If a shirt costs $14, and a retailer plans to sell it for $30, the markup would be:

Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 The most commonly used pricing technique for manufacturers is cost- plus pricing:  A manufacturer establishes a price that covers the cost of direct materials, direct labor, factory overhead, selling and administrative costs, and a desired profit margin Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 Absorption costing:  Traditional method of product costing in which all manufacturing and overhead costs are absorbed into the product’s total cost.  Variable or direct costing:  Product costing method that includes in the product’s costs only those costs that can vary directly with the quantity produced Copyright © 2016 Pearson Education, Inc.

Break-even selling price = Profit + (Variable cost per unit x Quantity produced) + Total fixed cost Quantity produced Copyright © 2016 Pearson Education, Inc.

 To establish a reasonable, profitable price for service, small business owners must know the cost of materials, direct labor, and overhead for each unit of service they provide. Price Total cost per hour = productive hour ÷ (1-net profit as a % of sales) Copyright © 2016 Pearson Education, Inc.

 58% of small business owners say that their customers expect them to accept credit cards.  But, companies incur an additional cost to offer this service.  Three options for selling on credit:  Credit (and debit cards)  Installment credit  Trade credit Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Percentage of Customers Who Shop Only at Businesses That Accept Multiple Forms of Payment

 Credit cards: typical consumer has 3.75 credit cards.  Research: Customers who use credit cards make purchases that are 112% higher than if they had used cash.  On a typical $100 credit card purchase, cost to business = $2.33.  Interchange fee Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 About 0.9% of online credit card transactions are fraudulent.  To minimize credit card fraud:  Use an address verification system  Require a CVV2 number  Check customers IP addresses  Monitor Web site activity with analytics  Verify large orders  Post notices on Web site that your company uses anti-fraud technology  Contact the credit card company or bank that issued the card Copyright © 2016 Pearson Education, Inc.

 Debit cards  Shoppers make almost 53 billion debit card transactions, totaling $2.1 trillion each year.  Mobile wallets:  Applications that link a smart phone or tablet to a credit or debit card, transforming the device into a digital wallet.  Growing form of payment.  Installment credit  Trade credit  Layaway Copyright © 2016 Pearson Education, Inc. (continued from 10-28)

 Pricing techniques impact every aspect of a company including:  Image  Customers  Cash flow  Profits Copyright © 2016 Pearson Education, Inc.