copyright © 2015 pearson education, inc. publishing as prentice hall 11-1

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 11-2

Chapter 11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

Price: the monetary value of a good or service; it is a measure of what a customer must give up to obtain a good or serviceSince the Great Recession customers have become

more price sensitiveIncreasing price by just 1% can produce an 11%

increase in a company’s profitsIn some cases, higher prices can increase the appeal

of a product or service

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The Reality of Pricing Decisions


Price range: the area between the price floor that is established by a company’s total cost to produce the product or provide the service and the price ceiling, which is the most the target customers are willing to pay

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What Determines Price?


When facing rising costs, consider the following strategies: Communicate with customersInclude a service charge instead of raising pricesEliminate discounts, coupons, and freebiesOffer smaller sizes or quantitiesImprove efficienciesAbsorb increases to maintain important customersEmphasize valueRaise prices incrementallyShift to less expensive raw materialsModify products or services to lower costs Lock in raw material prices early

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Price conveys image Prices send signals to customers about quality

and valueDon’t price too low!Key is understanding your target customers

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Competition and pricesWhen setting prices, business owners must

consider competitors’ pricesCompetitors’ locationsNature of the competing goods

Avoid head-to-head price competition when possibleFocus on non-price competition

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Focus on value Objective value vs. perceived value

Limited-time-only (LTO) discountsFighter brand

Three reference points define a fair price:1.Price paid in the past2.Prices competitors charge3.Company’s costs

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Pricing policies must be compatible with a company’s total marketing plan

Three strategies:1. Penetration2. Skimming3. Life cycle pricing

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New Product Pricing: Penetration, Skimming, or SlidingSatisfy three objectives:

1. Get the product acceptedRevolutionary products transform an industryEvolutionary products make improvements to

products that are already on the marketMe-too products are those that allow a

company merely to keep up with competitors 2. Maintain market share as competition grows3. Earn a profit

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Tips to avoid pricing mistakes:1.Be careful with cost-plus pricing2.Recognize that “me-too” pricing gives a company no

pricing power3.Realize that you cannot achieve the same profit

margin across every product line your company sells4.Recognize that your customer base is made up of

different customer segments and that some of them are more sensitive to price than others

5.Do not put off raising prices out of fear of a customer backlash

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6. Do not compensate sales reps solely on sales volume

7. Avoid price wars8. Realize that although discounts have their place in a

company’s pricing strategy, they can be addictive9. Recognize that some customers are more valuable

than others10.Remember that price is just one variable in the

equation

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Pricing Techniques for Established Products and ServicesOdd pricingPrice liningFreemium pricingDynamic pricingLeader pricing

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Geographic pricingZone pricingUniform delivered pricingF.O.B. seller

Discounts (or markdowns)Discounts or markdownsLimited-time offersSteadily decreasing discount (SDD)Multiple unit pricing

Bundling

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Optional Product PricingCaptive Product PricingBy-Product Pricing

Suggested retail pricesFollow-the-leader pricing

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Dollar Markup = Retail Price - Cost of Merchandise

Percentage (of Retail Price) Markup =

Dollar MarkupRetail Price

Percentage (of Cost) Markup =

Dollar MarkupCost of Unit


If a man’s shirt costs $14, and the manager plans to sell it for $30, the markup is:


To compute average markup:

Forecasting sales of $980,000, operating expenses of $540,000,

and $24,000 in reductions, and expecting a profit of $58,000, the initial markup percentage is


Computing the appropriate retail price:

Applying the markup of 62% to an item that costs the retailer $17:


The most commonly used pricing technique is cost plus pricing It’s simple to use!

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Components of Cost-Plus Pricing


Direct Costing and PricingAbsorption costing vs. variable (or direct)

costingContribution margin

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Full Absorption vs. Direct Cost Income Statement


Computing a Break-Even Selling Price


A manufacturer’s variable costs are:

To produce 50,000 units:


If the manufacturer wants to earn $75,0000:


Establish price based on materials used to provide the service, the labor employed, an allowance for overhead, and a profit

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Direct Cost Income Statement, Ned’s Computer Repair Shop


Total Cost Per Productive Hour, Ned’s Computer Repair Shop

Adding in profit margin of 18% of sales:


Assuming not all jobs require the same amount of materials:

Adding in profit margin of 18% of sales:


A job that takes four hours to complete would have the following price:


Linking pricing strategy with credit strategy has become essential in today’s business world

Three options for selling on credit:1. Credit cards2. Installment credit3. Trade credit

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Credit CardsConsumers around the globe hold more than 2

billion credit cardsUse them to purchase nearly $6.1 trillion in

goods and services annually—more than $11.5 million in purchases per minute

Research shows that customers who use credit cards make purchases that are 112 percent higher than if they had used cash

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E-commerce and credit cardsDebit cardsInstallment creditTrade creditLayaway

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copyright © 2015 pearson education, inc. publishing as prentice hall 11-1

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