13-1 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Chapter 13 Pricing and Credit Strategies In the Spotlight: Oregon Flavor Rack In the Spotlight: Oregon Flavor Rack

13-2 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Learning Objectives: Chapter Discuss the role of cost and demand factors in setting a price. 2. Apply break-even analysis and markup pricing. 3. Identify specific pricing strategies. 4. Explain the benefits of credit, factors that affect credit extension, and types of credit. 5. Describe the activities involved in managing credit.

13-3 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing The Three Components of Total Cost Used in Determining Pricing Total Cost Selling cost Overhead cost Cost of goods sold

13-4 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Sales revenue (25,000 $8)$200,000 Total costs: Fixed costs$75,000 Variable costs ($2 per unit)50,000 Gross margin Average cost = = $5 Sales revenue (10,000 $8)$ 80,000 Total costs: Fixed costs$75,000 Variable costs ($2 per unit)20,000 Gross margin Average cost = = $9.50 Cost Structure of a Hypothetical Firm, 1999 and 2000 $125,000 25,000 $95,000 10, $125,000 75,000 95,000 $(15,000 )

13-5 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Break - Even Chart for Pricing (a) Loss Profit Break-Even Point Sales (Price = $12) Total Cost Total Variable Costs Total Fixed Costs Production in Units Costs and Revenue ($)

13-6 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Break - Even Chart for Pricing (b) Sales (Price = $18) Total Cost Break-Even Points Production in Units Costs and Revenue ($) Sales (Price = $12) Sales (Price = $7)

13-7 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Formulas for Markup Calculations Cost + Markup = Selling price Cost = Selling price - Markup Markup = Selling price - Cost x 100 = Markup expressed as a percentage of selling price x 100 = Markup expressed as a percentage of cost Markup Selling price Markup Cost To convert markup as a percentage of selling price into a percentage of cost, or vice versa, the two formulas below are useful: Markup as percentage of selling price 100% - Markup as percentage of selling price Markup as percentage of cost 100% + Markup as percentage of cost x 100 = Markup as percentage of cost x 100 = Markup as percentage of selling price

13-8 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Types of Pricing Strategies Penetration pricing strategy Skimming pricing strategy Follow-the-leader pricing strategy Variable pricing strategy Flexible pricing strategy Price lining strategy What the traffic will bear

13-9 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Benefits of Credit to Buyers and Sellers Benefits of Credit to Buyers 1.The ability to satisfy immediate needs and pay for them later 2.Better records of purchases on credit billing statements 3.Better service and greater convenience when exchanging purchased items 4.Establishment of a credit history Benefits of Credit to Sellers 1.Closer association with customers because of implied trust 2.Easier selling through telephone- and mail-order systems 3.Smoother sales peaks and valleys, since purchasing power is always available 4.Easy access to a tool with which to stay competitive

13-10 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Types of Credit Consumer Credit Open charge accounts Installment accounts Revolving charge accounts Credit Cards Bank credit cards Entertainment credit cards Retailer credit cards Trade Credit Consumer Credit Open charge accounts Installment accounts Revolving charge accounts Credit Cards Bank credit cards Entertainment credit cards Retailer credit cards Trade Credit

13-11 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Commonly Used Trade Credit Terms Credit Term Explanation 3/10, net 60 Three percent discount if payment is made within the first 10 days, net (full amount) due by sixtieth day from invoice date E.O.M. Billing at the end of the month, covering all credit purchases during that month C.O.D. Amount due is to be collected upon delivery of the goods 2/10, net 30, R.O.G. Two percent discount if payment is made within 10 days; net due by thirtieth day however, both discount period and 30 days start from the date of receipt of the goods 2/10, net 30, E.O.M. Two percent discount if payment is made within 10 days; net due by the 30th day however, both periods start from the end of the month in which the sale was made

13-12 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Hypothetical Aging Schedule for Accounts Receivable Customer Account Number Account Status Total Days past due 120 days$50,000 $50, days$10,000 $10, days$40,000 $40, days$20,000$20,000 $40, days$50,000$10,000 $60,000 Total overdue$50,000$30,000$80,000$40,000$ 0 $200,000 Not due (beyond discount period)$30,000$10,000$ 0$10,000$130,000$180,000 Not due (still in discount period)$20,000 $100,000$ 0$90,000$220,000$430,000 Credit ratingABCAA

13-13 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Federal Regulation of Credit 1968 Truth-in-Lending Act The Fair Credit Billing Act The Fair Credit Reporting Act The Equal Credit Opportunity Act The Fair Debt Collection Practices Act