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Chapter 5
Strategic Planning
Regarding
Operating
Processes
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
What are the Primary Influences on
Selling Price?
• Customers—
 customers want high quality and service at a
reasonable price
 Must understand customers and respond to
their needs
 Price increase, demand decreases
 Price decrease, demand increases
• These trends can be affected by
 loyalty and unwillingness to substitute (ex: coffee)
 staple vs. luxury item (hamburger vs steak)
 Perceived high quality and service (Toyota vs Ford)
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What are the Primary Influences on
Selling Price?
• Competitor—
 Depending on the competitiveness of the
market, competitors may influence the selling
price
 Must monitor and learn from them
• Pure competition
 Market determines selling price
 Individual company is price taker (ex: agriculture industry)
• Monopolistic competition
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 Market influences selling price
 Individual companies influence selling price through
advertising (ex: airlines, computers, athletic wear)
What are the Primary Influences on
Selling Price?
• Legal and social forces—
 there are legal restrictions and social influences on
selling price
 Must monitor changes and learn from them
 Monopoly (ex: utility companies)
• One company controls market and selling price
• Government approves price changes
 Oligopoly (ex: oil companies)
• Very few companies control selling price
• Government monitors selling prices
 Price fixing
 Price gouging
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What are the Primary Influences on
Selling Price?
• Cost—
 In the long run, the selling price set by a company must
cover all its costs and provide a sufficient return to the
owners
 Must control costs and eliminate non-value added
activities
• Markup - what is added to cost of product to ensure profit
• Selling margin = selling price - cost
• Selling margin % = selling margin/selling price
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How does the External Market
Influence Selling Prices?
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•
•
•
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Pure competition
Monopolistic competition
Oligopoly
Monopoly
What is the Difference between Penetration
Pricing and Predatory Pricing?
• Penetration pricing
 Setting a lower initial selling price to entice
customers to try the product/service
 Legal
• Predatory pricing
 Setting a low initial selling price (usually below
cost) to drive out the competition
 Then raise prices once they control the market
 Illegal
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What is the Difference between
Skimming Pricing and Price Gouging?
• Skimming pricing
 Setting higher initial selling prices due to
uniqueness of product
 Appeals to customers who want to be the first
to own the product and are willing to pay more
 Later when novelty wears off, lowers the price
 Legal
• Gouging
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 Setting high price due to unusual increase in
demand (gas prices on 9/11)
 Illegal
What is the Difference between Lifecycle and Target Pricing?
• Life-cycle pricing
 Setting a selling price for the life of the
product/service based on cost
 Determine cost, determine required markup,
set selling price
• Target pricing
 Setting a selling price for the life of the
product/service based on the market
 Determine selling price, determine required
return, set target cost
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What are the Common Reasons for
Holding Inventory?
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•
•
•
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Meet customer demand
Smooth production scheduling
Take advantage of quantity discounts
Hedge against anticipated cost increases
What are the Common Reasons for
Not Holding Inventory?
• Significant costs are incurred
• Holding inventory allows the company the
“hide” its internal process problems
because demand can be met from inventory
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What are the Common
Compensation Plans?
• Piece rate
 Pay based on units completed
• Commission
 Pay based on sales
• Hourly
 Pay based on hours worked
• Salary
 Pay based on period of time
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What are Other Compensation
Issues?
• Insurance
 Protection for employees
• Paid leave
 Protection for the company
• Bonuses
 Additional pay based on some future event
• Gross pay versus net pay
 Gross = amount earned
 Net = amount received
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