1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 4 Focusing on the Customer: Marketing Growth Strategies Pricing and Credit Decisions

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–2 Looking Ahead After studying this chapter, you should be able to: 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.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–3 Setting a Price The revenue of a firm is a direct reflection of two components: sales volume and price. Price must be sufficient to cover total cost plus some margin of profit. A firm should examine elasticity of demand—the relationship of price and quantity demanded—when setting a price. A product’s competitive advantage is a demand factor in setting price.

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–4 Break-Even Analysis and Markup Pricing Analyzing costs and revenue under different price assumptions identifies the break-even point, the quantity sold at which total costs equal total revenue. The usefulness of break-even analysis is enhanced by incorporating sales forecasts. Markup pricing is a generalized cost-plus system of pricing used by intermediaries with many products.

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–5 Pricing Strategies Penetration pricing and skimming pricing are short-term strategies used when new products are first introduced into the market. Follow-the-leader and variable pricing are special strategies that reflect the nature of the competition’s pricing and concessions to customers. A price lining strategy simplifies choices for customers by offering a range of several distinct prices. State and federal laws must be considered in setting prices, as well as any impact that a price may have on other product line items.

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–6 CreditCredit Credit offers potential benefits to both buyers and sellers. Type of business, credit policies of competitors, income level of customers, and availability of adequate working capital affect the decision to extend credit. The two broad classes of credit are consumer credit and trade credit.

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–7 Managing Credit Evaluating the credit status of applicants begins with the completion of an application form. Customers are evaluated through the five Cs of credit: character, capital, capacity, conditions, and collateral. Pertinent credit data can be obtained from several outside sources, including formal trade-credit agencies such as Dun & Bradstreet. An accounts receivable aging schedule can be used to improve the credit collection process. A small firm should establish a formal procedure for billing and collecting from charge customers. It is important to follow all relevant credit regulations.

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 15–8 Key Terms price credit total cost total variable costs total fixed costs average pricing elasticity of demand elastic demand inelastic demand prestige pricing break-even point markup pricing penetration pricing strategy skimming price strategy follow-the-leader pricing strategy variable pricing strategy dynamic 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