chap10 pricing for profit

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Chapter 10: Pricing and Credit 1Copyright 2003 Prentice Hall Publishing Company

Pricing for Profit




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



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?")

?




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




Introducing a New ProductIntroducing a New Product

Three StrategiesThree Strategies::

PenetrationPenetration

SkimmingSkimming

Sliding down the demand curveSliding down the demand curve




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




Pricing Established Goods Pricing Established Goods

and Servicesand Services Opportunistic pricingOpportunistic pricing

DiscountsDiscounts

Multiple pricingMultiple pricing

BundlingBundling

Suggested retail pricesSuggested retail prices




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




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




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




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




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




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)




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




Consumer CreditConsumer Credit

Credit cardsCredit cards

NationalNational

PrivatePrivate

Installment creditInstallment credit

Trade creditTrade credit

chap10 pricing for profit

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