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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

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Page 1: 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
Page 2: 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

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.

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Page 3: 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

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.

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Page 4: 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

Price Changes Affect Revenues

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16–4

Situation AQuantity sold x Price per unit = Gross revenue

250,000 $3.00 $750,000

Situation BQuantity sold x Price per unit = Gross revenue

250,000 $2.80 $700,000

Difference in Revenue $50,000

Page 5: 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

Cost Determination for Pricing

• Total Cost The sum of cost of goods sold, selling expenses, and

overhead costs.

• Variable Costs Costs that vary with the quantity produced or sold.

• 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.

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Page 6: 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

16–6© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cost Structure of a Hypothetical Firm, 201316.1

Page 7: 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

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Cost of Structure of a Hypothetical Firm, 2014

Average pricing overlooks the reality of higher average costs at lower sales levels

16.2

Page 8: 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

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

How Customer Demand Affects Pricing

• 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.

Inelastic Demand Demand that does not change

significantly when there is a change in the price of the product.

16–8

Demand

Price

Elastic

Inelastic

Page 9: 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

Pricing and Competitive Advantage

• Pricing and a Firm’s 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.

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Page 10: 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

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.

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Break-even units sold

=total fixed costs and expenses

selling price – unit variable costs and expenses

Page 11: 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

units

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Break-Even Graphs for Pricing16.3

Page 12: 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

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.

Contribution margin The difference between the unit selling price

and the unit variable costs and expenses.

• 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.

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Page 13: 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

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A Break-Even Graph Adjusted for Estimated Demand16.4

Page 14: 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

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

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price selling of percentage aas Markup100PriceSelling

Markup

cost of percentage aas Markup100Cost

Markup

Retail adage: Markup on purchased cost, markdown on selling price

Page 15: 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

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Selecting a Pricing Strategy

16–15

Penetration Pricing

Follow-the-Leader Pricing

Dynamic Pricing

What the Market Will

Bear: Adaptive Pricing

Price Lining

Variable Pricing

Skimming Pricing

Pricing Strategie

s

Page 16: 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

Selecting a Pricing Strategy (cont’d)

• Setting Prices: Controls and Situations The Sherman Antitrust Act generally 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!

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Page 17: 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

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

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Page 18: 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

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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 over the Internet.

Helps smooth sales demand since purchasing power is always available.

Provides easy access to a tool with which to stay competitive.

16–18

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© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Selling on Credit

16–19

Type of business

Economic conditions

Credit policies of competito

rs

Factors that Affect Selling on Credit

Income level of

customers

Availability of

working capital

Page 20: 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

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 invoice amount is due in 30 days.

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Page 21: 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

Types of Consumer Credit Accounts

• Open Charge Account Is a line of credit that allows the customer to obtain a

product at the time of purchase.

• Installment Account Is a line of credit that requires a down payment, with

the balance paid over a specified period of time.

• Revolving Charge Account Is a line of credit on which the customer may charge

purchases at any time, up to a pre-established limit.

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Page 22: 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

Types of Credit Cards

• Bank Credit and Debit Cards Are issued by banks that are widely accepted by

retailers who pay a fee to the banks for handling their credit transactions.

• Travel and Entertainment Credit Cards Were originally used to purchase services, now widely

accepted for merchandise.

• Retailer Credit Cards Are issued by firms for specific use in their retail

outlets or for purchasing their products or services.

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Page 23: 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

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 Capacity Capital Collateral Conditions

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Page 24: 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

Sources of Credit Information

• Individuals Customer’s previous credit history Credit information exchanges

• Businesses Financial statements of the firm Other sellers to the firm Firm’s banker Trade-credit agencies Credit bureaus Online credit data

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Page 25: 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

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Hypothetical Aging Schedule for Accounts Receivable16.5

Page 26: 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

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.

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Page 27: 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

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

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Page 28: 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

Key Termsadaptive pricing

aging schedule

average pricing

bad-debt ratio

break-even analysis

break-even point

consumer credit

contribution margin

credit bureaus

credit card

credit

debit card

elastic demand

elasticity of demand

follow-the-leader pricing strategy

inelastic demand

installment account

markup pricing

open charge account

penetration pricing strategy

prestige pricing

price lining strategy

revolving charge account

skimming price strategy

trade credit

trade-credit agencies

value

variable pricing strategy

16–28© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.