copyright © 2016 pearson education, inc. 1. pricing and credit strategies 10 10-2 section 3:...
TRANSCRIPT
Copyright © 2016 Pearson Education, Inc. 1
Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.
Pricing and Credit Strategies
1100
10-2
Section 3: Launching the Business
Discuss the relationships among pricing, image, competition, and value.
Describe effective pricing techniques for introducing new products or services and for existing ones.
Explain the pricing methods and strategies for retailers, manufacturers, and service firms.
Describe the impact of credit on pricing.
10 - 3Copyright © 2016 Pearson Education, Inc.
Pricing: Is governed both by art and science.Requires balancing a multitude of complex
forces. Influences every aspect of a small company.Is an important signal of value to customers.
Involves both math and psychology. Has a greater impact on profits than
corresponding increases in unit volume or reductions in costs.
10 - 4Copyright © 2016 Pearson Education, Inc.
10 - 5Copyright © 2016 Pearson Education, Inc.
Companies that take a strategic approach to pricing and monitor its results can raise their sales revenue between 1 and 8%Example: Duane Reade
10 - 6Copyright © 2016 Pearson Education, Inc.
Price sends important signals to customers: quality, prestige, uniqueness, etc.
Common small business mistake: charging prices that are too low and failing to recognize extra value, service, quality, and other benefits they offer.
The key is to understand the target market and identify how much customers are willing to pay rather than how much to charge.
10 - 7Copyright © 2016 Pearson Education, Inc.
Must take into account competitors’ prices, but it is not always necessary to match or beat them.
Key is to differentiate a company’s products and services.
Price wars often eradicate companies’ profits and scar an industry for years.
Best strategy: Stay out of a price war!
10 - 8Copyright © 2016 Pearson Education, Inc.
10 - 9Copyright © 2016 Pearson Education, Inc.
The “right” price for a product or service depends on the value it provides for a customer.
Two aspects of price:Objective valuePerceived value: determines the price customers are willing to pay.
Value is not synonymous with low price.Fighter brand
10 - 10Copyright © 2016 Pearson Education, Inc.
Communicate with customersAdd a surchargeFocus on improving efficiencyConsider absorbing cost increasesEliminate discounts, coupons, and
freebiesUse cheaper raw materialsRaise prices incrementally and
consistently
10 - 11Copyright © 2016 Pearson Education, Inc.
Modify the product or service to lower its cost
Offer products in smaller sizes or quantities Differentiate your company and its products
and services from the competition Anticipate rising costs and try to lock in
prices of raw materials early Emphasize the value of your company’s
product or service to customers
10 - 12Copyright © 2016 Pearson Education, Inc.
(continued)
10 - 13Copyright © 2016 Pearson Education, Inc.
Three Goals:1. Getting the product accepted
Revolutionary products Evolutionary products Me-too products
2. Maintaining market share as competition grows
3. Earning a profit
10 - 14Copyright © 2016 Pearson Education, Inc.
Three basic pricing strategies:1. Penetration2. Skimming3. Life cycle pricing
10 - 15Copyright © 2016 Pearson Education, Inc.
(continued)
Odd pricingPrice liningFreemium pricingDynamic pricing Leader pricingGeographic pricingDiscounts (markdowns)
10 - 16Copyright © 2016 Pearson Education, Inc.
BundlingOptional-product pricing Captive-product pricingBy-product pricingSuggested retail pricesFollow-the-leader pricing
10 - 17Copyright © 2016 Pearson Education, Inc.
(continued)
10 - 18Copyright © 2016 Pearson Education, Inc.
If a shirt costs $14, and a retailer plans to sell it for $30, the markup would be:
10 - 19Copyright © 2016 Pearson Education, Inc.
10 - 20Copyright © 2016 Pearson Education, Inc.
The most commonly used pricing technique for manufacturers is cost-plus pricing: A manufacturer establishes a price
that covers the cost of direct materials, direct labor, factory overhead, selling and administrative costs, and a desired profit margin.
10 - 21Copyright © 2016 Pearson Education, Inc.
10 - 22Copyright © 2016 Pearson Education, Inc.
Absorption costing: Traditional method of product
costing in which all manufacturing and overhead costs are absorbed into the product’s total cost.
Variable or direct costing: Product costing method that
includes in the product’s costs only those costs that can vary directly with the quantity produced.
10 - 23Copyright © 2016 Pearson Education, Inc.
Break-even selling price =
Profit + (Variable cost per unit x Quantity produced) + Total fixed cost
Quantity produced
10 - 24Copyright © 2016 Pearson Education, Inc.
To establish a reasonable, profitable price for service, small business owners must know the cost of materials, direct labor, and overhead for each unit of service they provide.
Price Total cost per hour = productive hour ÷ (1-net profit as a % of
sales)
10 - 25Copyright © 2016 Pearson Education, Inc.
58% of small business owners say that their customers expect them to accept credit cards.But, companies incur an additional cost
to offer this service.Three options for selling on credit:
Credit (and debit cards)Installment creditTrade credit
10 - 26Copyright © 2016 Pearson Education, Inc.
10 - 27Copyright © 2016 Pearson Education, Inc.
Percentage of Customers Who Shop Only at Businesses That Accept Multiple Forms of Payment
Credit cards: typical consumer has 3.75 credit cards.
Research: Customers who use credit cards make purchases that are 112% higher than if they had used cash.
On a typical $100 credit card purchase, cost to business = $2.33.
Interchange fee
10 - 28Copyright © 2016 Pearson Education, Inc.
10 - 29Copyright © 2016 Pearson Education, Inc.
About 0.9% of online credit card transactions are fraudulent.
To minimize credit card fraud:Use an address verification systemRequire a CVV2 numberCheck customers IP addressesMonitor Web site activity with analyticsVerify large ordersPost notices on Web site that your company uses anti-
fraud technologyContact the credit card company or bank that issued
the card
10 - 30Copyright © 2016 Pearson Education, Inc.
Debit cardsShoppers make almost 53 billion debit card
transactions, totaling $2.1 trillion each year.Mobile wallets:
Applications that link a smart phone or tablet to a credit or debit card, transforming the device into a digital wallet.
Growing form of payment.Installment creditTrade creditLayaway
10 - 31Copyright © 2016 Pearson Education, Inc.
(continued from 10-28)
Pricing techniques impact every aspect of a company including:
Image Customers Cash flow Profits
10 - 32Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc. 10 - 33