1. Pricing and Credit Decisions
PART 4 Focusing on the Customer: Marketing Growth Strategies

2. Looking Ahead After studying this chapter, you should be able to:
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.

3. Setting a Price Price Credit
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
Credit
An agreement between a buyer and a seller that provides for delayed payment for a product or service.

4. Price Changes Affect Revenues
Situation A Quantity sold x Price per unit = Gross revenue 250,000 $3.00 $750, Situation B Quantity sold x Price per unit = Gross revenue 250,000 $2.80 $700, Difference in Revenue $50,000

5. Exhibit 16.1 The Three Components of Total Cost in Determining Price

6. 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.
Average Pricing
An approach in which total cost for a given period is divided by quantity sold in that period to set a price.

7. Exhibit 16.2 Cost Structure of a Hypothetical Firm, 2009

8. Exhibit 16.3 Cost Structure of a Hypothetical Firm, 2010
Average pricing overlooks the reality of higher average costs at lower sales levels

9. How Customer Demand Affects Pricing
The 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.
Inelastic Demand
Demand that does not change significantly when there is a change in the price of the product.
Demand
Price
Elastic
Inelastic

10. Pricing and 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.

11. 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

12. Exhibit 16.4 Break-Even Graphs for Pricing

13. 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.
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.

14. Exhibit 16.5 A Break-Even Graph Adjusted for Estimated Demand

15. 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

16. 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

17. 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!

18. Benefits of Credit to Borrowers
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

19. Offering Credit (cont’d)
Benefits of Credit to Sellers
Facilitates increased sales volume.
Brings a closer association with customers.
Fosters easier selling through telephone, mail and Internet.
Helps smooth sales demand since purchasing power is always available.
Provides easy access to a tool with which to stay competitive.

20. Selling on Credit Factors That Affect Selling on Credit
Type of Business
Credit Policies of Competitors
Income Level of Customers
Availability of Working Capital

21. 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 amount of the invoice is due in 30 days.

22. Types of Consumer Credit Accounts
Open Charge Account
A line of credit that allows the customer to obtain a product at the time of purchase.
Installment Account
A line of credit that requires a down payment, with the balance paid over a specified period of time.
Revolving Charge Account
A line of credit on which the customer may charge purchases at any time, up to a pre-established limit.

23. Entertainment Credit Cards
Types of Credit Cards
Bank Credit Cards
Credit cards issued by banks that are widely accepted by retailers who pay a fee to the banks for handling their credit transactions.
Entertainment Credit Cards
Business credit cards originally used to purchase services, now widely accepted for merchandise.
Retailer Credit Cards
Credit cards issued by firms for specific use in their outlets or for purchasing their products or services.

24. 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?
The Traditional Five C’s of Credit
Character
Capital
Capacity
Conditions
Collateral

25. Sources of Credit Information
Individuals
Customer’s previous credit history
Dun & Bradstreet Business Information Reports
Businesses
Financial statements of the firm
Other sellers to the firm
Firm’s banker
Trade-credit agencies
Credit bureaus
Online credit data

26. Exhibit 16.6 Hypothetical Aging Schedule for Accounts Receivable

27. 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.

28. 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

29. Key Terms price credit total cost variable costs fixed costs
average pricing
elasticity of demand
elastic demand
inelastic demand
prestige pricing
break-even point
contribution margin
markup pricing
penetration pricing strategy
skimming price strategy
follow-the-leader pricing strategy
variable pricing strategy
dynamic (personalized) pricing strategy
price lining strategy
consumer credit
trade credit
open charge account
installment account
revolving charge account
trade-credit agencies
credit bureaus
aging schedule
bad-debt ratio