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

Economic conditions Economic conditions Seasonal fluctuations Seasonal fluctuations Customers’ price sensitivity Customers’ price sensitivity Psychological factors Psychological factors Credit terms and purchase discounts Credit terms and purchase discounts Desired image Desired image Product or service costs Product or service costs Customers’ characteristics Customers’ characteristics Market forces Market forces Competitors’ prices Competitors’ prices Sales volume Sales volume Company’s image Company’s image Customers expectations Customers expectations Factors Affecting Price Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

What determines price? Price Ceiling ("What will the market bear?") Price Floor ("What are the company's costs?") Acceptable Price Price Range Range ? ? ? ? ? ? ? ? ? ? ? Final Price (What is the company's desired "image?") Final Price (What is the company's desired "image?") ? Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 4 Pricing: Dealing with Rapidly Rising Costs Communicate with your customers Communicate with your customers Include a surcharge Include a surcharge Eliminate discounts, coupons, or “freebies” Eliminate discounts, coupons, or “freebies” Focus on efficiency Focus on efficiency Consider absorbing cost increases Consider absorbing cost increases Emphasize the value your company provides to customers Emphasize the value your company provides to customers Try to lock in prices with suppliers Try to lock in prices with suppliers

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 5 Three Pricing Forces: Image, Competition, and Value Price conveys image Price conveys image  Prices send signals to customers about quality and value  Key is understanding your target customers When setting prices, business owners must consider competitors’ prices When setting prices, business owners must consider competitors’ prices  Competitors’ locations  Nature of the competing goods

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 6 Three Pricing Forces: Image, Competition, and Value When setting prices, business owners must consider competitors’ prices When setting prices, business owners must consider competitors’ prices  Avoid price wars! Focus on value Focus on value  Objective value vs. perceived value  Three reference points: Price paid in the past Price paid in the past Prices competitors charge Prices competitors charge Company’s costs Company’s costs (Continued)

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 7 New Product Pricing Three types of products: Revolutionary products transform an industry Revolutionary products transform an industry Evolutionary products make improvements to products that are already on the market Evolutionary products make improvements to products that are already on the market Me-too products are those that allow a company merely to keep up with competitors Me-too products are those that allow a company merely to keep up with competitors Pricing flexibility for each type?

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 8 Introducing a New Product Three Goals: Get the product accepted Get the product accepted Maintain market share as competition grows Maintain market share as competition grows Earn a profit Earn a profit

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 9 Introducing a New Product Three Strategies: Penetration Penetration Skimming Skimming Life cycle pricing Life cycle pricing

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 10 Pricing Established Goods and Services Odd pricing Odd pricing Price lining Price lining Dynamic pricing Dynamic pricing Leader pricing Leader pricing

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11 Pricing Established Goods and Services Geographic pricing Geographic pricing  Zone pricing  Uniform delivered pricing  F.O.B. seller Opportunistic pricing Opportunistic pricing Discounts (or markdowns) Discounts (or markdowns) Multiple pricing Multiple pricing

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 12 Pricing Established Goods and Services Bundling Bundling  Optional product pricing  Captive product pricing  By-product pricing Suggested retail prices Suggested retail prices Follow-the-leader pricing Follow-the-leader pricing

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 13 Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Percentage (of Cost) Markup = Dollar Markup Cost of Unit

Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Percentage (of Cost) Markup = Dollar Markup Cost of Unit Example: Dollar Markup = $25 - $15 = $10 Percentage (of Retail Price) Markup = $10 $25 = 40% Percentage (of Cost) Markup = $10 $15 = 67% Pricing for Retailers: Markup Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Pricing for Manufacturers: Cost-Plus Pricing Direct Labor Direct Materials Factory Overhead Selling and Administrative Costs Profit Margin Selling Price Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 16 Pricing for Manufacturers: Breakeven Selling Price BreakevenSellingPriceQuantity = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced

Pricing for Manufacturers: Breakeven Selling Price Example: BreakevenSellingPrice = $0 6.98/unit 50,000 unit $110,000 $110,000 + { x } + 50,000 units = $9.18 per unit BreakevenSellingPriceQuantity = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Pricing for Service Firms: Price per Hour Price per Hour = Total cost per x 1 productive hour (1 - net profit target as productive hour (1 - net profit target as a % of sales) a % of sales) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

a % of sales) a % of sales) Example: Ned’s TV Repair Shop Price per Hour = $18.59 per x 1 hour (1 -.18) hour (1 -.18) = $22.68 per hour Pricing for Service Firms: Price per Hour Price per Hour = Total cost per x 1 productive hour (1 - net profit target as productive hour (1 - net profit target as Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 20 Consumer Credit Nearly 144 million Americans have credit cards Nearly 144 million Americans have credit cards Average person has 4 credit cards Average person has 4 credit cards Customers use credit cards to purchase $1.8 trillion of goods annually Customers use credit cards to purchase $1.8 trillion of goods annually Customers make 30% of personal consumption expenditures with either credit or debit cards Customers make 30% of personal consumption expenditures with either credit or debit cards

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 21 Credit and Pricing Merchants incur fees to be able to accept credit cards Merchants incur fees to be able to accept credit cards  Application fee  Transaction fees  Interchange fees  Equipment fee  Licensing fee  Holdbacks and chargebacks

Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 22 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall