Post on 04-Jan-2016
Entrepreneurship and Small Business Management
Chapter 8 Pricing and Credit Strategies
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Steps to Better Pricing1. 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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Common Use of Pricing Strategiesby Business TypePricing Strategy Mfg. Wholesal
eRetail Service
Cost-Plus X X X X
Follow-the-Leader X X X
Meet-or-Beat-the -Competition
X X X X
Penetration X X
Personalized X X
Prestige X X
Skimming X X
Value X X
Variable X X
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Example Chain of Markups
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Service Business:Calculating Cost Per Hour
Fixed Costs + Variable Costs – Materials
Hours
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Extending Credit to CustomersPros 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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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