1. Entrepreneurship and Small Business Management
Chapter 8
Pricing and Credit Strategies

2. Ch. 8 Performance Objectives
Understand the relationship between price and overall strategy.
Describe various pricing strategies.
Calculate markups from manufacturer through the consumer.
Explore the role of trade credit in pricing.
Consider discounts, incentives, and other price adjustments.

3. 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.

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
Pricing Strategy
Mfg.
Wholesale
Retail
Service
Cost-Plus X
Follow-the-Leader
Meet-or-Beat-the -Competition
Penetration
Personalized
Prestige
Skimming
Value
Variable

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
$1.00 Manufacturer’s Cost x Markup %
= $2.00 Manufacturer’s Price
$2.00 Wholesaler’s Cost x Markup %
= $2.40 Wholesaler’s Price
$2.40 Retailer’s Cost x Markup %
= $4.80 Retailer’s Price
Consumer’s Cost = $4.80

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. 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

19. 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