Download Chapter 15

Part 4
Focusing on the Customer: Marketing Growth Strategies
CHAPTER 15
Pricing and
Credit Decisions
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Looking AHEAD
After you have read this chapter, you should be able to:
1. Discuss the role of cost and demand factors in setting
a price.
2. Apply break-even analysis and markup pricing.
3. Identify specific pricing strategies.
4. Explain the benefits of credit, factors that affect credit
extension, and types of credit.
5. Describe the activities involved in managing credit.
© 2008 Cengage Learning. All rights reserved.
15–2
Setting a Price
• Price
A specification of what a seller requires in exchange
for transferring ownership or use of a product or
service.
 Prices set too low, loss in revenue
 Price set too high, loss in revenue
 Price and demand are related for many goods and
services
• Credit
An agreement between a buyer and a seller that
provides for delayed payment for a product or service.
© 2008 Cengage Learning. All rights reserved.
15–3
Price Changes Affect Revenues
Situation A
Quantity sold x Price per unit = Gross revenue
250,000
$3.00
$750,000
Situation B
Quantity sold x Price per unit = Gross revenue
250,000
$2.80
$700,000
Difference in Revenue
© 2008 Cengage Learning. All rights reserved.
$50,000
15–4
15-1
The Three Components of Total Cost in Determining Price
© 2008 Cengage Learning. All rights reserved.
15–5
Cost Determination for Pricing
• Total Cost
 The sum of cost of goods sold, selling expenses, and
overhead costs.
• Total Variable Costs
 Costs that vary with the quantity produced or sold.
• Total Fixed Costs
 Costs that remain constant as the quantity product or
sold varies.
• Average Pricing
 An approach in which total cost for a given period is
divided by quantity sold in that period to set a price.
© 2008 Cengage Learning. All rights reserved.
15–6
15-2
Cost Structure of a Hypothetical Firm, 2007
© 2008 Cengage Learning. All rights reserved.
15–7
15-3
Cost Structure of a Hypothetical Firm, 2008
Average pricing overlooks the reality of
higher average costs at lower sales levels
© 2008 Cengage Learning. All rights reserved.
15–8
How Customer Demand Affects Pricing
• The Elasticity of Demand
 The degree to which a change in price affects the
quantity demanded.
 Elastic Demand
 Demand
that changes
significantly when there
is a change in the price
of the product.
Price
Inelastic
Elastic
 Inelastic Demand
 Demand
that does not change
significantly when there is a
change in the price of the product.
© 2008 Cengage Learning. All rights reserved.
Demand
15–9
Pricing and a Firm’s Competitive Advantage
• Pricing and Competitive Advantage
 Customers will demand and pay more for a product
or service that they perceive as important to their
needs.
• Prestige Pricing
 Setting a high price to convey an image of high
quality or uniqueness (competitive advantage).
 Customers associate price with quality.
 Markets with low levels of product knowledge are
candidates for prestige pricing.
© 2008 Cengage Learning. All rights reserved.
15–10
Applying a Pricing System
• Break-Even Analysis
 A comparison of alternative cost and revenue
estimates in order to determine the acceptability of
each price.
 Steps in the analysis
 Examining revenue-cost relationships: the quantity
at which the product will generate enough revenue
to start earning a profit.
 Incorporating actual sales forecasts into the
analysis.
© 2008 Cengage Learning. All rights reserved.
15–11
15-4
Break-Even Graphs for Pricing
© 2008 Cengage Learning. All rights reserved.
15–12
Applying a Pricing System (cont’d)
• Examining Cost and Revenue Relationships
Breakeven Point
 The
sales volume at which total sales revenue
equals total costs (fixed and variable).
 The point at which profitability starts and losses
cease.
• Incorporating Sales Forecasts
Adjusted Break-Even Analysis
 Price
has a variable impact and influence on
demand.
 Adjusting for the indirect effect of price allows for a
more realistic profit area to be identified.
© 2008 Cengage Learning. All rights reserved.
15–13
15-5
A Break-Even Graph Adjusted for Estimated Demand
© 2008 Cengage Learning. All rights reserved.
15–14
Applying a Pricing System (cont’d)
• Markup Pricing
Cost plus pricing system that adds a markup
percentage to cover:
 Operating expenses
 Subsequent price reductions
 Desired profit
Markup
100  Markup as a percentage of selling price
Selling Price
Markup
100  Markup as a percentage of cost
Cost
© 2008 Cengage Learning. All rights reserved.
15–15
Selecting a Pricing Strategy
Penetration
Pricing
Follow-theLeader Pricing
Skimming
Pricing
Pricing
Strategies
Variable
Pricing
Price
Lining
© 2008 Cengage Learning. All rights reserved.
Dynamic
Pricing
What the Market
Will Bear
15–16
Selecting a Pricing Strategy (cont’d)
• Setting Prices: Controls and Situations
 The Sherman Antitrust Act prohibits competitors from
conspiring to fix prices.
 The effect of the introduction of new products into an
established product line.
 Offering discounts to match the needs of customers.
 If the initial price appears to be off target, make any
necessary adjustments and keep on selling!
© 2008 Cengage Learning. All rights reserved.
15–17
Offering Credit
• Benefits of Credit to Borrowers
Provides working capital
Ability to satisfy immediate needs and pay later
Better records of purchases on credit billing
Better service and greater convenience when
exchanging purchased items
Establishment of credit history
© 2008 Cengage Learning. All rights reserved.
15–18
Offering Credit (cont’d)
• Benefits of Credit to Sellers
Facilitates increased sales volume.
Brings a closer association with customers.
Fosters easier selling through telephone, mail and
Internet.
Helps smooth sales demand since
purchasing power is always available.
Provides easy access to a tool
with which to stay competitive.
© 2008 Cengage Learning. All rights reserved.
15–19
Offering Credit (cont’d)
Factors That Affect Selling
on Credit
Type of
Business
Credit
Policies of
Competitors
© 2008 Cengage Learning. All rights reserved.
Income
Level of
Customers
Availability
of Working
Capital
15–20
Types of Credit
• Consumer Credit
Financing granted by retailers to individuals who
purchase for personal or family use.
• Trade Credit
Financing provided by a supplier of inventory to a
given company which sets up an account payable for
the amount.
 Terms of sale may be 2/10, net 30—two percent
discount on the invoiced amount if paid in full within
10 days of the invoice date, otherwise the full
amount of the invoice is due in 30 days.
© 2008 Cengage Learning. All rights reserved.
15–21
Types of Consumer Credit Accounts
• Open Charge Account
A line of credit that allows the customer to obtain a
product at the time of purchase.
• Installment Account
A line of credit that requires a down payment, with the
balance paid over a specified period of time.
• Revolving Charge Account
A line of credit on which the customer may charge
purchases at any time, up to a pre-established limit.
© 2008 Cengage Learning. All rights reserved.
15–22
Types of Credit Cards
• Bank Credit Cards
Credit cards issued by banks that are widely accepted
by retailers who pay a fee to the banks for handling
their credit transactions.
• Entertainment Credit Cards
Business credit cards originally used to purchase
services, now widely accepted for merchandise.
• Retailer Credit Cards
Credit cards issued by firms for specific use in their
outlets or for purchasing their products or services.
© 2008 Cengage Learning. All rights reserved.
15–23
Managing the Credit Process
• Evaluation of Credit Applicants
Can the buyer pay as promised?
Will the buyer pay?
If so, when will the buyer pay?
If not, can the buyer be forced to pay?
• The Traditional Five C’s of Credit
Character
Capital
Capacity
Conditions
Collateral
© 2008 Cengage Learning. All rights reserved.
15–24
Sources of Credit Information
• Individuals
Customer’s previous credit history
Dun & Bradstreet Business Information Reports
• Businesses
Financial statements of the firm
Other sellers to the firm
Firm’s banker
Trade-credit agencies
Credit bureaus
Online credit data
© 2008 Cengage Learning. All rights reserved.
15–25
15-6
Hypothetical Aging Schedule for Accounts Receivable
© 2008 Cengage Learning. All rights reserved.
15–26
Managing the Credit Process (cont’d)
• Billing and Collection Procedures
Timely notification is a most effective collection
method for keeping bills current.
Warning consumers that they may do damage to their
credit if they fail to pay.
Bad debt ratio
 A number
obtained by dividing the amount of bad
debts by the total amount of credit sales.
© 2008 Cengage Learning. All rights reserved.
15–27
Credit Regulation
• The Truth-in-Lending Act (1968)
• The Fair Credit Billing Act
• The Fair Credit Reporting Act
• The Equal Credit Opportunity Act
• The Fair Debt Collection Practices Act
© 2008 Cengage Learning. All rights reserved.
15–28
Key TERMS
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price
credit
total cost
total variable costs
total fixed costs
average pricing
elasticity of demand
elastic demand
inelastic demand
prestige pricing
break-even point
markup pricing
penetration pricing strategy
skimming price strategy
© 2008 Cengage Learning. All rights reserved.
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follow-the-leader pricing strategy
variable pricing strategy
dynamic (personal) pricing strategy
price lining strategy
consumer credit
trade credit
open charge account
installment account
revolving charge account
trade-credit agencies
credit bureaus
aging schedule
bad-debt ratio
15–29