Entrepreneurship and small business management chapter 08

8 Performance Objectives Understand the relationship between price and overall strategy.. Relationship Between Price and Overall Strategy  The price helps to position the product/ ser

Entrepreneurship and Small

Business Management

Chapter 8

Pricing and Credit Strategies

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.

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.

Steps to Better Pricing

1 Assess what value your customers

place on the product/service.

2 Look for variations in the way

customers value the product/service.

3 Assess customers’ price sensitivity.

4 Identify an optimal pricing structure.

5 Consider competitors’ reactions.

Steps to Better Pricing

(continued)

6 Monitor prices realized at the

transaction level.

7 Assess customers’ emotional

response.

8 Analyze whether the returns are

worth the cost to serve.

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

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

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

Common Use of Pricing Strategies

by Business Type

Pricing Strategy Mfg Wholesale Retail Service

MeetorBeatthe

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.

Example Chain of Markups

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

Service Business:

Calculating Cost Per Hour

Fixed Costs + Variable Costs – Materials

Hours

Service Business:

Pricing Example

Cost of Services

(15 hours x $95.50/hr.)

Cost of Materials

Cost of Materials Markup (70%)

Total Service Price

$1,432.50

200.00 140.00

$1,772.50

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

Extending Credit to Customers

Pros

 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

Cons

 Slower cash flow

 Risk of unpaid loans

 Start-up and ongoing fees

 Additional management processes required to approve and maintain credit accounts

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

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

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