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Chapter 10: Pricing and Credit 1Copyright 2003 Prentice Hall Publishing Company
Pricing for Profit
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Chapter 10: Pricing and Credit 2Copyright 2003 Prentice Hall Publishing Company
Business locationBusiness location
Seasonal fluctuationsSeasonal fluctuations
Psychological factorsPsychological factors
Credit terms andCredit terms and
purchase discountspurchase discounts
Customers¶ priceCustomers¶ pricesensitivitysensitivity
Desired imageDesired image
Product or service costsProduct or service costs
Market factorsMarket factors
Sales volumeSales volume
Competitors¶ pricesCompetitors¶ prices
Company¶s competitiveCompany¶s competitive
advantageadvantage Economic conditionsEconomic conditions
Factors Affecting PriceFactors Affecting Price
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What determines price?What determines price?
Price CeilingPrice Ceiling ("What will the market bear?")("What will the market bear?")
Price Floor Price Floor ("What are the company's costs?")("What are the company's costs?")
Acceptable AcceptablePricePrice
RangeRange
?
??
?
?
??
?
?
?
?
Final Price (What is the
company's desired "image?")
?
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Chapter 10: Pricing and Credit 4Copyright 2003 Prentice Hall Publishing Company
Introducing a New ProductIntroducing a New Product
Three GoalsThree Goals::
Get the product acceptedGet the product accepted
Maintain market share as competitionMaintain market share as competition
growsgrows
Earn a profitEarn a profit
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Chapter 10: Pricing and Credit 5Copyright 2003 Prentice Hall Publishing Company
Introducing a New ProductIntroducing a New Product
Three StrategiesThree Strategies::
PenetrationPenetration
SkimmingSkimming
Sliding down the demand curveSliding down the demand curve
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Chapter 10: Pricing and Credit 6Copyright 2003 Prentice Hall Publishing Company
Pricing Established Goods Pricing Established Goods
and Servicesand Services Odd pricingOdd pricing
Price liningPrice lining
Leader pricingLeader pricing Geographic pricingGeographic pricing
Zone pricingZone pricing
Uniform deliveredUniform deliveredpricingpricing
F.O.B factoryF.O.B factory
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Chapter 10: Pricing and Credit 7Copyright 2003 Prentice Hall Publishing Company
Pricing Established Goods Pricing Established Goods
and Servicesand Services Opportunistic pricingOpportunistic pricing
DiscountsDiscounts
Multiple pricingMultiple pricing
BundlingBundling
Suggested retail pricesSuggested retail prices
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Chapter 10: Pricing and Credit 8Copyright 2003 Prentice Hall Publishing Company
Two Pricing Forces: Image andTwo Pricing Forces: Image and
CompetitionCompetition
Price conveys image. Price conveys image.
Prices send signals to customers aboutPrices send signals to customers about
quality and valuequality and value
When setting prices, business owners When setting prices, business owners
must consider competitors¶ prices.must consider competitors¶ prices.
Competitors¶ locationsCompetitors¶ locations Nature of the competing goods Nature of the competing goods
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Chapter 10: Pricing and Credit 9Copyright 2003 Prentice Hall Publishing Company
Pricing for Retailers: Pricing for Retailers:
Mark upMark up
Dollar Mark up = Retail PriceDollar Mark up = Retail Price -- Cost of MerchandiseCost of Merchandise
Percentage (of Retail Price) Mark up =Percentage (of Retail Price) Mark up =Dollar Mark upDollar Mark up
Retail PriceRetail Price
Percentage (of Cost) Mark up =Percentage (of Cost) Mark up =Dollar Mark upDollar Mark up
Cost of UnitCost of Unit
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Chapter 10: Pricing and Credit 10Copyright 2003 Prentice Hall Publishing Company
Dollar Mark up = Retail PriceDollar Mark up = Retail Price -- Cost of MerchandiseCost of Merchandise
Percentage (of Retail Price) Mark up =Percentage (of Retail Price) Mark up =Dollar Mark upDollar Mark up
Retail PriceRetail Price
Percentage (of Cost) Mark up =Percentage (of Cost) Mark up =Dollar Mark upDollar Mark up
Cost of UnitCost of UnitExampleExample::
Dollar Mark up = $25Dollar Mark up = $25 -- $15 = $10$15 = $10
Percentage (of Retail Price) Mark up =Percentage (of Retail Price) Mark up =$10$10
$25$25= 40%= 40%
Percentage (of Cost) Mark up =Percentage (of Cost) Mark up =$10$10
$15$15= 67%= 67%
Pricing for Retailers: Pricing for Retailers:
Mark upMark up
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Chapter 10: Pricing and Credit 11Copyright 2003 Prentice Hall Publishing Company
Pricing for Manufacturers: Pricing for Manufacturers:
Breakeven Selling PriceBreakeven Selling Price
BreakevenBreakevenSellingSellingPricePrice
QuantityQuantity
==ProfitProfit
Variable costVariable cost
per unitper unit producedproduced
TotalTotal
fixedfixed
costscosts++
{{{{ xx
}}}} ++
Quantity producedQuantity produced
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Chapter 10: Pricing and Credit 12Copyright 2003 Prentice Hall Publishing Company
Pricing for Manufacturers: Pricing for Manufacturers:
Breakeven Selling PriceBreakeven Selling Price
BreakevenBreakevenSellingSellingPricePrice
QuantityQuantity
ExampleExample::
==ProfitProfit
Variable costVariable cost
per unitper unit producedproduced
TotalTotal
fixedfixed
costscosts++
{{{{ xx
}}}} ++
Quantity producedQuantity produced
BreakevenBreakeven
SellingSellingPricePrice
== $0$0 6.98/unit6.98/unit 50,000 unit50,000 unit $110,000$110,000++ {{ xx }} ++50,000 units50,000 units
= $9.18 per unit= $9.18 per unit
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Chapter 10: Pricing and Credit 13Copyright 2003 Prentice Hall Publishing Company
Pricing for Service Firms: Pricing for Service Firms:
Price per HourPrice per Hour
Price per Hour = Total cost per x 1Price per Hour = Total cost per x 1
productive hour (1productive hour (1 -- net profit target asnet profit target as
a % of sales)a % of sales)
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Chapter 10: Pricing and Credit 14Copyright 2003 Prentice Hall Publishing Company
Pricing for Service Firms: Pricing for Service Firms:
Price per HourPrice per Hour
Price per Hour = Total cost per x 1Price per Hour = Total cost per x 1
productive hour (1productive hour (1 -- net profit target asnet profit target as
a % of sales)a % of sales)
Example: Ned¶s TV Repair ShopExample: Ned¶s TV Repair Shop
Price per Hour = $13.44 per x 1Price per Hour = $13.44 per x 1hour (1hour (1 --.18).18)
= $16.38 per hour= $16.38 per hour
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Chapter 10: Pricing and Credit 15Copyright 2003 Prentice Hall Publishing Company
Consumer CreditConsumer Credit
Credit cardsCredit cards
NationalNational
PrivatePrivate
Installment creditInstallment credit
Trade creditTrade credit