Entrepreneurship and small business management chapter 08
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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.
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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.
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Steps to Better Pricing
1.
2.
3.
4.
5.
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.
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Steps to Better Pricing
(continued)
6.
7.
8.
Monitor prices realized at the
transaction level.
Assess customers’ emotional
response.
Analyze whether the returns are
worth the cost to serve.
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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
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
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
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
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
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Common Use of Pricing
Strategies
by Business Type
Pricing Strategy
Mfg.
Wholesal
e
Retail
Service
Cost-Plus
X
X
X
X
Follow-the-Leader
X
X
X
Meet-or-Beat-the
-Competition
X
X
X
Penetration
X
X
Personalized
X
X
Prestige
X
X
Skimming
X
X
X
Value
Variable
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X
X
X
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
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.
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Example Chain of Markups
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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
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Service Business:
Calculating Cost Per Hour
Fixed Costs + Variable Costs –
Materials
Hours
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Service Business:
Pricing Example
Cost of Services
(15 hours x $95.50/hr.)
$1,432.50
Cost of Materials
200.00
Cost of Materials Markup
(70%)
140.00
$1,772.50
Total Service Price
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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
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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
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Slower cash flow
Risk of unpaid loans
Start-up and ongoing
fees
Additional
management
processes required to
approve and maintain
credit accounts
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07458.
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
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© 2012 Pearson Education, Upper Saddle River, NJ
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Types of Price Adjustments
Order size
(quantity) discounts
Annual, quarterly,
or monthly volume
discounts/bonuses
Dealer and
distributor
discounts
Promotion discounts
and bonuses
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Merchandising
discounts
Co-op advertising
and marketing
allowances
Product rebates
Exception discounts
Freight/shipping
allowances
© 2012 Pearson Education, Upper Saddle River, NJ
07458.
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
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