1. Session 8: PRICING AND CREDIT STRATEGIES

2. Relationship Between Price and Overall Strategy
The price helps to position the product/service in the market.
The pricing strategy should reflect the company’s overall strategy.
A low price is not always better; consumers may make quality judgments based on the price.

3. Price and Quality Dimensions

4. Steps to Better Pricing
Assess what value your customers place on the product/service.
Look for variations in the way customers value the product/service.
Assess customers’ price sensitivity.
Identify an optimal pricing structure.
Consider competitors’ reactions.

5. Steps to Better Pricing (continued)
Monitor prices realized at the transaction level.
Assess customers’ emotional response.
Analyze whether the returns are worth the cost to serve.

6. Pricing Strategies Value pricing—offer more for less cost.
Prestige pricing—set a high price to convey high quality or uniqueness.
Cost-plus pricing—use your cost plus a desired profit margin.
Markup pricing—apply a predetermined percentage to the product’s cost.
Penetration pricing—charge a lower initial price to capture market share.

7. Pricing Strategies (continued)
Skimming price—charge a higher initial price while there are few competitors.
Meet-or-beat-the-competition pricing—match or undercut competitors’ prices.
Follow-the-leader pricing—use a particular competitor (usually the dominate one in the industry) as the model for pricing.

8. Pricing Strategies (continued)
Personalized (dynamic) pricing—charge certain customers a premium over the standard price.
Variable pricing—use different prices for the same product or service (to allow for discounts, credit terms, price concessions).
Price lining—create a range of distinctive pricing levels.

9. Common Use of Pricing Strategies by Business Type

10. Calculating Markups
Manufacturers and retailers often double (keystone) their cost.
Wholesalers often operate on smaller margins.
Service businesses may use cost plus a mark-up on hourly labor rates and materials costs.

11. Example Chain of Markups

12. Pricing by Service Businesses
Primary “product” cost is labor.
Other pricing factors include:
Competitive environment.
Cost of materials used to deliver the service.
Overhead costs.
Desired profit levels.

13. Service Business: Calculating Cost Per Hour
Fixed Costs + Variable Costs – Materials Hours

14. Service Business: Pricing Example
Cost of Services (15 hours x $95.50/hr.) Cost of Materials Cost of Materials Markup (70%) Total Service Price
$1, $1,772.50

15. Demand Affects Pricing
Market clearing price—point at which supply of product matches demand.
Flexibility of pricing depends on the demand elasticity of your customers:
Elastic—demand changes significantly up or down when the price changes.
Inelastic—demand does not change much when the price changes.

16. Extending Credit to Customers
Pros
Cons
Raises revenues and promotes business growth; product or service is accessible to many more people.
Reduces the loss of customers to competitors who offer credit.
Slower cash flow.
Risk of unpaid loans.
Start-up and ongoing fees.
Additional management processes required to approve and maintain credit accounts.

17. Types of Credit Store or merchant credit cards. Installment credit:
Loan is paid back, with interest, over a specified time period in installments.
Purchased item serves as collateral.
Trade credit:
Cash-in-advance (COA) terms.
Cash-on-delivery (COD) terms.

18. Managing the Credit Process
Establish procedures early on.
Use a well-designed credit application.
Look at customers’ past performance.
Track and manage accounts receivables.
Review state and federal credit guidelines.

19. Types of Price Adjustments
Order size (quantity) discounts
Annual, quarterly, or monthly volume discounts/bonuses
Dealer and distributor discounts
Promotion discounts and bonuses
Merchandising discounts
Co-op advertising and marketing allowances
Product rebates
Exception discounts
Freight/shipping allowances

20. Price Adjustment Analysis
Pocket price—what remains after all pricing factors, such as discounts and allowances, are deducted from the list or invoice price to reach the final price.
Pocket price band—range of prices for a given unit volume of a particular item at a given point in time.

21. Pocket Price Waterfall Example

22. Pocket Price Brand Example