Transcript Small Business Management 13e

Pricing and Credit
Decisions
Part 4 Focusing on the Customer:
Marketing Growth Strategies
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright © 2006 Thomson Business & Professional Publishing.
All rights reserved.
Looking Ahead
After studying this chapter, you should be able to:
1.
2.
3.
4.
5.
Discuss the role of cost and demand factors in setting
a price.
Apply break-even analysis and markup pricing.
Identify specific pricing strategies.
Explain the benefits of credit, factors that affect credit
extension, and types of credit.
Describe the activities involved in managing credit.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–2
Setting a Price
• The revenue of a firm is a direct reflection of two
components: sales volume and price.
• Price must be sufficient to cover total cost plus some
margin of profit.
• A firm should examine elasticity of demand—the
relationship of price and quantity demanded—when
setting a price.
• A product’s competitive advantage is a demand factor in
setting price.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–3
Break-Even Analysis and Markup Pricing
• Analyzing costs and revenue under different price
assumptions identifies the break-even point, the quantity
sold at which total costs equal total revenue.
• The usefulness of break-even analysis is enhanced by
incorporating sales forecasts.
• Markup pricing is a generalized cost-plus system of
pricing used by intermediaries with many products.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–4
Pricing Strategies
• Penetration pricing and skimming pricing are short-term
strategies used when new products are first introduced
into the market.
• Follow-the-leader and variable pricing are special
strategies that reflect the nature of the competition’s
pricing and concessions to customers.
• A price lining strategy simplifies choices for customers
by offering a range of several distinct prices.
• State and federal laws must be considered in setting
prices, as well as any impact that a price may have on
other product line items.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–5
Credit
• Credit offers potential benefits to both buyers and
sellers.
• Type of business, credit policies of competitors, income
level of customers, and availability of adequate working
capital affect the decision to extend credit.
• The two broad classes of credit are consumer credit and
trade credit.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–6
Managing Credit
• Evaluating the credit status of applicants begins with the
completion of an application form.
• Customers are evaluated through the five Cs of credit:
character, capital, capacity, conditions, and collateral.
• Pertinent credit data can be obtained from several
outside sources, including formal trade-credit agencies
such as Dun & Bradstreet.
• An accounts receivable aging schedule can be used to
improve the credit collection process.
• A small firm should establish a formal procedure for
billing and collecting from charge customers.
• It is important to follow all relevant credit regulations.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–7
Key Terms
price
follow-the-leader pricing
credit
strategy
total cost
variable pricing strategy
total variable costs
dynamic pricing strategy
total fixed costs
price lining strategy
average pricing
consumer credit
elasticity of demand
trade credit
elastic demand
open charge account
inelastic demand
installment account
prestige pricing
revolving charge account
break-even point
trade-credit agencies
markup pricing
credit bureaus
penetration pricing strategy
aging schedule
skimming price strategy
bad-debt ratio
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 15–8