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

2. Learning Objectives: Chapter 13
1. 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.
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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3. The Three Components of Total Cost Used in Determining Pricing
Cost of
goods sold
Selling
cost
Overhead cost
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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4. Cost Structure of a Hypothetical Firm, 1999 and 2000
Sales revenue (25,000 $8) $200,000 Total costs: Fixed costs $75,000 Variable costs ($2 per unit) 50, Gross margin Average cost = = $5
Sales revenue (10,000 $8) $ 80,000 Total costs: Fixed costs $75,000 Variable costs ($2 per unit) 20, Gross margin
Average cost = = $9.50
$125,000 75,000
$125,000 25,000
2000
95,000 $(15,000)
$95,000 10,000
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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5. Break-Even Chart for Pricing (a)
Sales (Price = $12)
900
Profit
Total Cost
700
Break-Even Point
Total Variable Costs
Costs and Revenue ($)
500
300
Loss
Total Fixed Costs
100 10 30 50 70 90
Production in Units
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
13-5

6. Break-Even Chart for Pricing (b)
Sales (Price = $18)
Sales (Price = $12)
900
Sales (Price = $7)
700
Total Cost
Costs and Revenue ($)
500
300
Break-Even Points
100 10 30 50 70 90
Production in Units
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
13-6

7. Formulas for Markup Calculations
Cost + Markup = Selling price Cost = Selling price - Markup Markup = Selling price - Cost
Markup Selling price
x 100 = Markup expressed as a percentage of selling price
x 100 = Markup expressed as a percentage of cost
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
x 100 = Markup as percentage of cost
Markup as percentage of cost 100% + Markup as percentage of cost
x 100 =
Markup as percentage of
selling price
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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8. 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
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
13-8

9. Benefits of Credit to Buyers and Sellers
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
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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10. 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
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
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11. Commonly Used Trade Credit Terms
Credit Term Explanation
Three percent discount if payment is made within the first 10 days, net (full amount) due by sixtieth day from invoice date
3/10, net 60
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
Small Business Management, 11th edition
Longenecker, Moore, and Petty
2000
South-Western College Publishing
13-11

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