Types of Pricing StrategiesTypes of Pricing Strategies

• Penetration pricing Penetration pricing strategystrategy

• Skimming pricing Skimming pricing strategystrategy

• Variable pricing strategyVariable pricing strategy

Mark-up PricingMark-up Pricing

Mark-up Based on CostMark-up Based on Cost

Example:Example:

Good cost 6.00Good cost 6.00

50% markup 50% markup 3.003.00

Selling price 9.00Selling price 9.00

Market Assessment PricingMarket Assessment Pricing

• 6% buy 4 at 3.50 each6% buy 4 at 3.50 each

• 10% buy 4 at 3.00 each10% buy 4 at 3.00 each

• 13% buy 4 at 2.50 each13% buy 4 at 2.50 each

Target population is 10,000Target population is 10,000

Market Assessment PricingMarket Assessment Pricing

CustomersCustomers

(X4)(X4)

SoldSold PricePrice SalesSales

Var.Var.

CostCost

Gross Gross

Marg.Marg.

600600 24002400 3.503.50 8,4008,400 4,8004,800 3,6003,600

Market Assessment PricingMarket Assessment Pricing

CustomersCustomers

(X4)(X4)

SoldSold PricePrice SalesSales

Var.Var.

CostCost

Gross Gross

Marg.Marg.

600600 24002400 3.503.50 8,4008,400 4,8004,800 3,6003,600

10001000 40004000 3.003.00 12,00012,000 8,0008,000 4,0004,000

13001300 52005200 2.502.50 13,00013,000 10,40010,400 2,6002,600

Breakeven AnalysisBreakeven Analysis

• Fixed Costs (FC)Fixed Costs (FC) – Do not vary with sales – Do not vary with sales

• Variable Costs (VC)Variable Costs (VC) – Vary with sales – Vary with sales

Breakeven:Breakeven:

Sales = FC + VC (profits = 0)Sales = FC + VC (profits = 0)

Breakeven AnalysisBreakeven Analysis

Breakeven:Breakeven:

Sales = FC + VC (profits = 0)Sales = FC + VC (profits = 0)

Example:Example:

Revenue = $3 per cappuccinoRevenue = $3 per cappuccino

VC = $2 per cappuccinoVC = $2 per cappuccino

FC = $2000/monthFC = $2000/month

Breakeven AnalysisBreakeven Analysis

Breakeven:Breakeven:Sales = FC + VC (profits = 0)Sales = FC + VC (profits = 0)Example:Example:Revenue = $3 per cappuccinoRevenue = $3 per cappuccinoVC = $2 per cappuccinoVC = $2 per cappuccinoFC = $2000/monthFC = $2000/month

3X = 2X + 20003X = 2X + 2000

X = 2000 unitsX = 2000 units x $3 = x $3 = $6000 in sales$6000 in sales

Breakeven RepresentationBreakeven Representation

Fixed CostsFixed Costs

Breakeven pointBreakeven point

Total costTotal cost

RevenueRevenue

LossLoss

ProfitProfit

Breakeven AnalysisBreakeven Analysis

Breakeven:Breakeven:Sales = FC + VC (profits = 0)Sales = FC + VC (profits = 0)Example:Example:Revenue = $3 per cappuccinoRevenue = $3 per cappuccinoVC = $2.50 per cappuccinoVC = $2.50 per cappuccinoFC = $500/monthFC = $500/month

3X = 2.5X + 5003X = 2.5X + 500

X = 1000 unitsX = 1000 units x $3 = x $3 = $3000 in sales$3000 in sales

DiscountsDiscounts

Rate of interest on 2/10, net 30Rate of interest on 2/10, net 30

Discount paid if received 20 days earlyDiscount paid if received 20 days early

2% x (360 days/20 days) = 36%!2% x (360 days/20 days) = 36%!

Small Business Management, 11th editionLongenecker, Moore, and Petty© 2000South-Western College Publishing

Hypothetical Aging Schedule Hypothetical Aging Schedule for Accounts Receivablefor Accounts Receivable

Customer Account Number

Account Status 001 002 003 004 005 Total

Days past due 120 days $50,000 $50,000 90 days $10,000 $10,000 60 days $40,000 $40,000 30 days $20,000 $20,000 $40,000 15 days $50,000 $10,000 $60,000Total overdue $50,000 $30,000 $80,000 $40,000 $ 0 $200,000Not due (beyond discount period) $30,000 $10,000 $ 0 $10,000 $130,000 $180,000Not due (still in discount period) $20,000 $100,000 $ 0 $90,000 $220,000 $430,000

Credit rating A B C A A