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    Lecture 7 - Pricing and Credit Strategies

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    Lecture 7 - Pricing and Credit Strategies

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    26 views18 pages

    Lecture 7 - Pricing and Credit Strategies

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    workid11057

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    Pricing and Credit

    Strategies
    Lecture 7

    1
    PRICING
    • Pricing decisions have such a pervasive influence on all
    aspects of a small company, one of the most important
    considerations for entrepreneurs is to take a strategic
    approach to pricing their companies’ products and services.

    • A company’s pricing strategy is a major determinant of its


    image in the marketplace, is influenced by the pricing
    strategies of its competitors, and is an important element in
    the value that customers perceive its products or services
    provide. 2
    Three Pricing Forces: Image,
    Competition, and Value
    • Price conveys image
    • Prices send signals to customers about quality and value
    • Key is understanding your target customers
    • When setting prices, business owners must consider
    competitors’ prices
    • Competitors’ locations
    • Nature of the competing goods

    3
    Three Pricing Forces: Image,
    Competition, and Value
    • When setting prices, business owners must consider
    competitors’ prices
    • Avoid price wars!
    • Focus on value
    • Objective value vs. perceived value
    • Three reference points:
    • Price paid in the past
    • Prices competitors charge
    • Company’s costs 4
    What determines price?
    Price Ceiling ("What will the market bear?")

    ? ?
    ?
    Final Price (What is the
    Acceptable company's desired "image?") ?
    Price
    ?
    Range ? ?
    ?
    ? ?
    ? ?
    Price Floor ("What are the company's costs?")
    STRATEGIES FOR BUSINESSES
    FACING RAPIDLY RISING COSTS

    • Communicate with customers.


    • Rather than raise the price of the good or service, include a
    surcharge.
    • Eliminate customer discounts, coupons, and promotions
    • Offer products in smaller sizes or quantities
    • Focus on improving efficiency everywhere in the company
    • Emphasize the value your company provides to customers.
    • Shift to less expensive raw materials if possible
    6
    Pricing Strategies And Tactics

    New Product Pricing


    Three types of products:
    • 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
    Pricing flexibility for each type?
    7
    Introducing a New Product
    Three Goals:
    • Get the product accepted
    • Maintain market share as competition grows
    • Earn a profit
    Three Strategies:
    • Penetration
    • Skimming
    • Life cycle pricing
    8
    Pricing Established Goods
    and Services
    • Odd pricing: a pricing technique to set prices that end in odd numbers to
    create the psychological impression of lower prices.

    • Price lining: a technique that greatly simplifies the pricing function by


    pricing different products in a product line at different price points,
    depending on their quality, features, and cost.
    • Freemium Pricing: a pricing strategy that involves providing a basic
    product or service to customers for free but charging a premium for
    expanded or upgraded versions of the product or service.

    • Dynamic pricing: a technique in which a company sets different prices


    for the same products and services for different customers using the
    information they have collected about their customers. 9
    Pricing Established Goods
    and Services

    • Leader pricing: a technique that involves marking


    down the normal price of a popular item in an
    attempt to attract more customers who make
    incidental purchases of other items at regular prices.
    • Discounts (or markdowns): reductions from
    normal list prices
    • Multiple pricing: a technique offering customers
    discounts if they purchase in quantity
    10
    Pricing Established Goods
    and Services

    • Geographic pricing
    • Zone pricing: a technique that involves setting different prices for
    customers located in different territories because of different
    transportation costs.
    • Uniform delivered pricing: a technique in which a company
    charges all customers the same price regardless of their locations and
    different transportation costs.
    • F.O.B. seller: a pricing method in which a company sells
    merchandise to customers on the condition that they pay all shipping
    costs. 11
    Pricing Established Goods
    and Services

    • Bundling: grouping together several products or services or


    both into a package that offers customers extra value at a
    special price.
    • Optional product pricing: a technique that involves selling
    the base product for one price but selling the options or
    accessories for it at a much higher markup.
    • Captive product pricing: a technique that involves selling a
    product for a low price and charging a higher price for the
    accessories that accompany it. 12
    Pricing for Retailers: Markup
    Markup (Mark on): the difference between the cost of a
    product or service and its selling price.

    Markup = Retail Price - Cost of Merchandise

    Markup
    Percentage (of Retail Price) Markup = Retail Price

    Percentage (of Cost) Markup = Markup


    Cost of Unit

    13
    Pricing for Retailers: Markup

    Dollar Markup = Retail Price - Cost of Merchandise


    Dollar Markup
    Percentage (of Retail Price) Markup = Retail Price

    Percentage (of Cost) Markup = Dollar Markup


    Cost of Unit
    Example:
    Dollar Markup = $25 - $15 = $10
    $10
    Percentage (of Retail Price) Markup = = 40%
    $25
    $10 = 67%
    Percentage (of Cost) Markup =
    $15
    Pricing for Manufacturers: Cost-Plus Pricing

    Selling Price
    Profit Margin

    Selling and
    Administrative Costs

    Direct Labor
    Direct Materials
    Factory Overhead
    Pricing for Manufacturers: Breakeven
    Selling Price
    Total
    Breakeven { Variable cost Quantity } fixed
    Selling Profit + { per unit x produced } + costs
    =
    Price Quantity produced

    Example:

    Breakeven
    Selling $0 + { 6.98/unit x 50,000 unit } + $110,000
    =
    Price 50,000 units
    = $9.18 per unit
    The Impact of Credit on
    Pricing
    • Consumers crave convenience when they shop, and
    one of the most common conveniences they demand
    is the ability to purchase goods and services on credit.
    • Small businesses that fail to offer credit to their
    customers lose sales to competitors who do.
    • Customers make 30% of personal consumption
    expenditures with either credit or debit cards

    17
    Credit and Pricing

    • Credit Card
    • Debit Card
    • Mobile wallets
    • Installment credit
    • Trade Credit
    18

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