Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 1 Pricing and Credit Strategies

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 2 Seasonal fluctuations Seasonal fluctuations Customers’ price sensitivity Customers’ price sensitivity Psychological factors Psychological factors Credit terms and purchase discounts Credit terms and purchase discounts Desired image Desired image Product or service costs Product or service costs Market forces Market forces Competitors’ prices Competitors’ prices Sales volume Sales volume Company’s image Company’s image Customers expectations Customers expectations Economic conditions Economic conditions Factors Affecting Price

What determines price? Price Ceiling ("What will the market bear?") Price Floor ("What are the company's costs?") Acceptable Price Price Range Range ? ? ? ? ? ? ? ? ? ? ? Final Price (What is the company's desired "image?") Final Price (What is the company's desired "image?") ?

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 4 Pricing: Dealing with Rapidly Rising Costs Communicate with your customers Communicate with your customers Focus on efficiency Focus on efficiency Consider absorbing cost increases Consider absorbing cost increases Emphasize the value your company provides to customers Emphasize the value your company provides to customers Try to lock in prices with suppliers Try to lock in prices with suppliers

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 5 Two Pricing Forces: Image and Competition Price conveys image. 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. When setting prices, business owners must consider competitors’ prices.  Competitors’ locations  Nature of the competing goods

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 6 Introducing a New Product Three Goals: Get the product accepted Get the product accepted Maintain market share as competition grows Maintain market share as competition grows Earn a profit Earn a profit

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 7 Introducing a New Product Three Strategies: Penetration Penetration Skimming Skimming Sliding down the demand curve Sliding down the demand curve

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 8 Pricing Established Goods and Services Odd pricing Odd pricing Price lining Price lining Leader pricing Leader pricing Geographic pricing Geographic pricing  Zone pricing  Uniform delivered pricing  F.O.B seller

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 9 Pricing Established Goods and Services Opportunistic pricing Opportunistic pricing Discounts (or markdowns) Discounts (or markdowns) Multiple pricing Multiple pricing Bundling Bundling  Optional product pricing  Captive product pricing  By-product pricing

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 10 Pricing Established Goods and Services Suggested retail prices Suggested retail prices Follow-the-leader pricing Follow-the-leader pricing Below-market pricing Below-market pricing Adjustable (or dynamic) pricing Adjustable (or dynamic) pricing

The Pricing Strategy Balancing Act

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 12 Pricing for Retailers: Markup 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

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

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 14 Pricing for Manufacturers: Breakeven Selling Price BreakevenSellingPriceQuantity = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 15 Pricing for Manufacturers: Breakeven Selling Price BreakevenSellingPriceQuantity Example: = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced BreakevenSellingPrice = $0 6.98/unit 50,000 unit $110,000 $110,000 + { x } + 50,000 units = $9.18 per unit

Pricing for Service Firms: Price per Hour Price per Hour = Total cost per x 1 productive hour (1 - net profit target as productive hour (1 - net profit target as a % of sales) a % of sales)

Example: Jerry’s TV Repair Shop Price per Hour = $13.44 per x 1 hour (1 -.18) hour (1 -.18) = $16.38 per hour Pricing for Service Firms: Price per Hour Price per Hour = Total cost per x 1 productive hour (1 - net profit target as productive hour (1 - net profit target as

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 18 Consumer Credit More than 80% of U.S. households have credit cards More than 80% of U.S. households have credit cards Average U.S. household has 17 credit cards! Average U.S. household has 17 credit cards! Customers make 30% of personal consumption expenditures with either credit or debit cards. Customers make 30% of personal consumption expenditures with either credit or debit cards.

Chapter 10 Pricing & Credit Copyright 2006 Prentice Hall Publishing Company 19 Credit and Pricing Merchants incur fees to be able to accept credit cards. Merchants incur fees to be able to accept credit cards.  Application fee  Transaction fees  Interchange fees  Equipment fee  Licensing fee  Holdbacks and chargebacks