1. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 11-1

2. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-2 Chapter 11

3. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Price: the monetary value of a good or service; it is a measure of what a customer must give up to obtain a good or service  Since the Great Recession customers have become more price sensitive  Increasing price by just 1% can produce an 11% increase in a company’s profits  In some cases, higher prices can increase the appeal of a product or service 11-3

4. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-4 The Reality of Pricing Decisions

5. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Price range: the area between the price floor that is established by a company’s total cost to produce the product or provide the service and the price ceiling, which is the most the target customers are willing to pay 11-5

6. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-6 What Determines Price?

7. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  When facing rising costs, consider the following strategies:  Communicate with customers  Include a service charge instead of raising prices  Eliminate discounts, coupons, and freebies  Offer smaller sizes or quantities  Improve efficiencies  Absorb increases to maintain important customers  Emphasize value  Raise prices incrementally  Shift to less expensive raw materials  Modify products or services to lower costs  Lock in raw material prices early 11-7

8. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Price conveys image  Prices send signals to customers about quality and value  Don’t price too low!  Key is understanding your target customers 11-8

9. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Competition and prices  When setting prices, business owners must consider competitors’ prices  Competitors’ locations  Nature of the competing goods  Avoid head-to-head price competition when possible  Focus on non-price competition 11-9

10. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Focus on value  Objective value vs. perceived value  Limited-time-only (LTO) discounts  Fighter brand  Three reference points define a fair price: 1.Price paid in the past 2.Prices competitors charge 3.Company’s costs 11-10

11. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Pricing policies must be compatible with a company’s total marketing plan  Three strategies: 1.Penetration 2.Skimming 3.Life cycle pricing 11-11

12. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  New Product Pricing: Penetration, Skimming, or Sliding  Satisfy three objectives: 1.Get the product accepted  Revolutionary products transform an industry  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 2.Maintain market share as competition grows 3.Earn a profit 11-12

13. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Tips to avoid pricing mistakes: 1.Be careful with cost-plus pricing 2.Recognize that “me-too” pricing gives a company no pricing power 3.Realize that you cannot achieve the same profit margin across every product line your company sells 4.Recognize that your customer base is made up of different customer segments and that some of them are more sensitive to price than others 5.Do not put off raising prices out of fear of a customer backlash 11-13

14. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6.Do not compensate sales reps solely on sales volume 7.Avoid price wars 8.Realize that although discounts have their place in a company’s pricing strategy, they can be addictive 9.Recognize that some customers are more valuable than others 10.Remember that price is just one variable in the equation 11-14

15. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Pricing Techniques for Established Products and Services  Odd pricing  Price lining  Freemium pricing  Dynamic pricing  Leader pricing 11-15

16. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Geographic pricing  Zone pricing  Uniform delivered pricing  F.O.B. seller  Discounts (or markdowns)  Discounts or markdowns  Limited-time offers  Steadily decreasing discount (SDD)  Multiple unit pricing  Bundling 11-16

17. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Optional Product Pricing  Captive Product Pricing  By-Product Pricing  Suggested retail prices  Follow-the-leader pricing 11-17

18. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-18 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

19. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-19 If a man’s shirt costs $14, and the manager plans to sell it for $30, the markup is:

20. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-20 To compute average markup: Forecasting sales of $980,000, operating expenses of $540,000, and $24,000 in reductions, and expecting a profit of $ 58,000, the initial markup percentage is

21. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-21 Computing the appropriate retail price: Applying the markup of 62% to an item that costs the retailer $17:

22. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The most commonly used pricing technique is cost plus pricing  It’s simple to use! 11-22

23. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-23 Components of Cost-Plus Pricing

24. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Direct Costing and Pricing  Absorption costing vs. variable (or direct) costing  Contribution margin 11-24

25. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-25 Full Absorption vs. Direct Cost Income Statement

26. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-26 Computing a Break-Even Selling Price

27. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-27 A manufacturer’s variable costs are: To produce 50,000 units:

28. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-28 If the manufacturer wants to earn $75,0000:

29. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Establish price based on materials used to provide the service, the labor employed, an allowance for overhead, and a profit 11-29

30. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-30 Direct Cost Income Statement, Ned’s Computer Repair Shop

31. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-31 Total Cost Per Productive Hour, Ned’s Computer Repair Shop Adding in profit margin of 18% of sales:

32. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-32 Assuming not all jobs require the same amount of materials: Adding in profit margin of 18% of sales:

33. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-33 A job that takes four hours to complete would have the following price:

34. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Linking pricing strategy with credit strategy has become essential in today’s business world  Three options for selling on credit: 1.Credit cards 2.Installment credit 3.Trade credit 11-34

35. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Credit Cards  Consumers around the globe hold more than 2 billion credit cards  Use them to purchase nearly $6.1 trillion in goods and services annually—more than $11.5 million in purchases per minute  Research shows that customers who use credit cards make purchases that are 112 percent higher than if they had used cash 11-35

36. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  E-commerce and credit cards  Debit cards  Installment credit  Trade credit  Layaway 11-36

37. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-37