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Chapter ppt_11.pptx
- 1. Section 3: Launching theBusiness Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved
- 2. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Essentials of Entrepreneurship and Small Business Management Ninth Edition Chapter 11 Pricing and Credit Strategies
- 3. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives 1. Discuss the relationships among pricing, image, competition, and value. 2. Describe effective pricing techniques for introducing new products or services and for existing ones. 3. Explain the pricing methods and strategies for retailers, manufacturers, and service firms. 4. Describe the impact of credit and debit cards and mobile wallets on pricing.
- 4. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Introduction • Pricing: – Is governed by both art and science. – Requires balancing a multitude of complex forces. – Influences every aspect of a small company. – Is an important signal of value to customers. – Involves both math and psychology. – Has a greater impact on profits than corresponding increases in unit volume or reductions in costs.
- 5. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Impact of Pricing and Cost Improvements on Profitability Figure 11.1 The Impact of Pricing and Cost Improvements on Profitability Source: Based on Richard Hayes and Ranjit Singh, “CFO Insights: Pricing for Profitability: What’s in Your Pocket,” Deloitte, 2013, https://www2.deloitte.com/conte nt/dam/Deloitte/us/Documents/fi nance-transformation/uscfo-cfo- insights-pricing-forprofitability- 080113.pdf.
- 6. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Image, Competition, Value • Companies that take a strategic approach to pricing and monitor its results can raise their sales revenue between 1% and 8% – Example: Duane Reade
- 7. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Price Conveys Image • Price sends important signals to customers: quality, prestige, uniqueness, etc. • Common small business mistake: charging prices that are too low and failing to recognize extra value, service, quality, and other benefits they offer. • The key is to understand the target market and identify how much customers are willing to pay rather than how much to charge.
- 8. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Competition and Pricing • Must take into account competitors’ prices, but it is not always necessary to match or beat them. • Key is to differentiate a company’s products and services. • Price wars often eradicate companies’ profits and scar an industry for years. • Best strategy: Stay out of a price war!
- 9. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. The Reality of Setting Prices Figure 11.2 The Reality of Setting Prices Source: Based on data from William C. Dunkelberg and Holly Wade, “NFIB Small Business Economic Trends,” National Federation of Independent Businesses, July 2017, p. 8.
- 10. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Focus on Value • The “right” price for a product or service depends on the value it provides for a customer. • Two aspects of price: – Objective value – Perceived value: determines the price customers are willing to pay. • Value is not synonymous with low price. – Fighter brand
- 11. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Dealing with Rising Costs (1 of 2) • Communicate with customers • Add a surcharge • Focus on improving efficiency • Consider absorbing cost increases • Eliminate discounts, coupons, and freebies • Use cheaper raw materials • Raise prices incrementally and consistently
- 12. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Dealing with Rising Costs (2 of 2) • Modify the product or service to lower its cost • Offer products in smaller sizes or quantities • Differentiate your company and its products and services from the competition • Anticipate rising costs and try to lock in prices of raw materials early • Emphasize the value of your company’s product or service to customers
- 13. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. What Determines Price? Figure 11.3 What Determines Price?
- 14. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Introducing a New Product (1 of 2) Three Goals: 1. Getting the product accepted – Revolutionary products – Evolutionary products – Me-too products 2. Maintaining market share as competition grows 3. Earning a profit
- 15. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Introducing a New Product (2 of 2) Three basic pricing strategies: 1. Penetration 2. Skimming 3. Life cycle pricing
- 16. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Pricing Established Goods (1 of 2) • Odd pricing • Price lining • Price anchoring • Freemium pricing • Subscription pricing • Dynamic pricing • Leader pricing • Discounts (markdowns) • Geographic pricing – Zone pricing – Delivered pricing • Discounts – Earned discounts – Limited time offers – Steadily decreasing discount (SDD) – Multiple unit pricing
- 17. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Pricing Established Goods (2 of 2) • Bundling • Optional-product pricing • Captive-product pricing • By-product pricing • Suggested retail prices • Follow-the-leader pricing
- 18. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Pricing Strategies: Markup Dollar Markup =Retail price Cost of the merchandise Dollar markup Percentage (of retail price) markup = Retail price Dollar markup Percentage (of cost) markup = Cost of unit if a shirt costs $14, and a retailer plans to sell it for $30, the markup would be as follows: Dollar Markup = $30 $14 = $16 $16 Percentage (of retail price) markup = = 53.3% $30 $16 Percentage (of cost)markup = = 114.3% $14
- 19. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Table 11.1 Costs and Markup Calculations for Samsung’s Galaxy S6 Edge and Apple’s iPhone 7 (1 of 2) Component Samsung Galaxy S6 Edge Apple iPhone 7 (32GB) Display and touchscreen $85.00 $43.00 Processors $29.50 $26.90 Cameras $21.50 $19.90 User interface and sensors $14.75 $14.00 Memory $52.50 $16.40 Modules and processors $31.50 $43.20 Case and enclosure elements $12.00 $18.20 Power management device $5.40 $7.20 Lithium polymer battery $3.50 $2.50 Mechanical/Electromechanical components $23.00 $16.70
- 20. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Table 11.1 Costs and Markup Calculations for Samsung’s Galaxy S6 Edge and Apple’s iPhone 7 (2 of 2) Component Samsung Galaxy S6 Edge Apple iPhone 7 (32GB) Box contents $6.20 $11.80 Assembly and testing cost $5.60 $5.00 Total Cost $290.45 $224.80 Retail price (no contract) $799.99 $849.99 $ Markup = Price − Cost $509.54 $625.19 Percentage (of cost) markup = 175.4% 278.1% Source: Based on “iPhone 7 Materials Cost Higher Than Previous Versions, HIS Markit Teardown Reveals,” Business Wire, September 20, 2016, www.businesswire.com/news/home/20160920006782/en/iPhone-7-Materials-Costs-Higher- Previous-Versions; “Samsung Galaxy S6 Edge Pricier to Build, Cheaper to Buy Than Comparable iPhone 6 Plus, IHS Teardown Reveals,” IHS Markit, April 14, 2015, http://news.ihsmarkit.com/press-release/technology/samsung-galaxy-s6- edge-pricier-build-cheaper-buy-comparable-apple-iphone-6-.
- 21. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Initial Dollar Markup and Retail Price Operating expenses +Reductions + profit Initial dollar markup = Net Sales +Reductions Dollar cost RetailPrice = (1 Percentage of retail price markup)
- 22. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Pricing for Manufacturers • The most commonly used pricing technique for manufacturers is cost-plus pricing: – A manufacturer establishes a price that covers the cost of direct materials, direct labor, factory overhead, selling and administrative costs, and a desired profit margin.
- 23. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Cost-Plus Pricing Components Figure 11.5 Cost-Plus Pricing Components
- 24. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Direct Costing and Pricing (1 of 2) • Absorption costing: – Traditional method of product costing in which all manufacturing and overhead costs are absorbed into the product’s total cost. • Variable or direct costing: – Product costing method that includes in the product’s costs only those costs that can vary directly with the quantity produced.
- 25. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Break-Even Pricing Break - even sellingprice = Profit + (Variable cost per unit Quantity produced) + Total fixed cost Quantity produced
- 26. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Direct Costing and Pricing (2 of 2) • To establish a reasonable, profitable price for service, small business owners must know the cost of materials, direct labor, and overhead for each unit of service they provide. = productive hour Price Total cost per hour (1 net profit as a % of sales)
- 27. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Impact of Credit and Debit Cards and Mobile Wallets on Pricing • Customers expect to make purchases with credit cards. – But, companies incur an additional cost to offer this service. • E-commerce and credit cards • Debit cards • Mobile wallets • Installment credit • Trade credit • Layaway
- 28. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Top Three Payment Preferences Figure 11.6 Top Three Payment Preferences Among Shoppers Source: Based on 2016 U.S. Consumer Payment Study, Total Systems Services, 2016, p. 12.
- 29. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Consumer Credit (1 of 2) • Credit cards: typical consumer has 4 credit cards. – Research: Customers who use credit cards make purchases that are 12–18% higher than if they had used cash. – On a typical $100 credit card purchase, cost to business = $1.85. Interchange fee
- 30. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Typical Credit Card Transaction Figure 11.7 How a Typical Credit Card Transaction Works Sources: Based on “Credit Card Processing,” Card Fellow, 2013, www.cardfellow.com/content/creditcard-processing- guide.php#MoneyGo; “Credit Cards,” U.S. Government Accounting Office, September 2006, pp. 73–74.
- 31. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. E-Commerce and Credit Cards • E-commerce companies reject about 2.8% of orders because of suspicion of fraud. • To minimize credit card fraud: – Use an address verification system – Require a CVV2 number – Check customers IP addresses – Pay close attention to international orders – Monitor Web site activity with analytics – Verify large orders – Post notices on Web site that your company uses anti-fraud technology – Contact the credit card company or bank that issued the card
- 32. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Consumer Credit (2 of 2) • Debit cards – Shoppers make almost 70 billion debit card transactions, totaling $2.6 trillion each year. • Mobile wallets: – Applications that link a smart phone or tablet to a credit or debit card, transforming the device into a digital wallet. – Growing form of payment. • Installment credit • Trade credit • Layaway
- 33. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Conclusion • Pricing techniques impact every aspect of a company including: – Image – Customers – Cash flow – Profits
- 34. Copyright © 2019,2016, 2014 Pearson Education, Inc. All Rights Reserved. Copyright
Editor's Notes
- #2 If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available)
- #4 In this chapter, you will: 1. Discuss the relationships among pricing, image, competition, and value. 2. Describe effective pricing techniques for introducing new products or services and for existing ones. 3. Explain the pricing methods and strategies for retailers, manufacturers, and service firms. 4. Describe the impact of credit and debit cards and mobile wallets on pricing.
- #5 To survive, every business must make a profit. Although many factors determine a company’s ability to generate a profit, one of the most important is the prices its sets for its goods and services.
- #6 Research shows that proper pricing strategies have far greater impact on a company’s profits than corresponding increases in unit volume and reductions in fixed or variable costs.
- #7 Because pricing decisions have such a pervasive influence on all aspects of a small company, one of the most important considerations for entrepreneurs is to take a strategic rather than a piecemeal approach to pricing their companies’ products and services.
- #8 A company’s pricing policies communicate important information about its overall image to customers. Pricing sends an important signal to customers about a company, its brand, its position in the market, the quality of its products and services, the image it wants to create, and other important concepts.
- #9 When setting prices, entrepreneurs must take into account their competitors’ prices, but the decision to match or beat them is not automatic.
- #10 Price transparency due to the Internet, the ease of mobile shopping, and customers’ persistent post-recession price sensitivity impose constraints on companies’ ability to raise prices.
- #11 One of the most important determinants of customers’ response to a price is whether they perceive the price to be a fair exchange for the value they receive from the product or service. The good news is that, through marketing and other efforts, companies can influence customers’ perception of value.
- #12 Entrepreneurs often find themselves squeezed by rising operating and raw material costs but are hesitant to raise prices because they fear losing customers. Businesses facing rapidly rising costs in their businesses should consider these strategies.
- #14 The final price business owners set depends on the desired image they want to create for the business in their customers’ minds – discount, middle of the road, or prestige – and the perceived value it provides to customers.
- #15 Most entrepreneurs approach setting the price of a new product with a great deal of apprehension because they have no precedent on which to base their decisions.
- #16 Entrepreneurs have three basic strategies to choose from when establishing a new product’s price: penetration, skimming, and life cycle pricing.
- #17 Each of the following pricing tactics or techniques is part of the toolbox of pricing tactics entrepreneurs can use to set prices of established goods and services.
- #19 The basic premise of a successful business operation is selling a good or service for more than it costs to produce or provide. The difference between the cost of a product or service and its selling price is called markup (or markon).
- #20 Table 11.1 shows a breakdown of the cost of the components and markup calculations for Samsung’s Galaxy S6 Edge and Apple’s iPhone 7.
- #21 Table 11.1 shows a breakdown of the cost of the components and markup calculations for Samsung’s Galaxy S6 Edge and Apple’s iPhone 7.
- #22 Once entrepreneurs create a financial plan, including sales estimates and anticipated expenses, they can compute their companies’ initial markup. The initial markup is the average markup required on all merchandise to cover the cost of the items, all incidental expenses, and a reasonable profit.
- #23 The main advantage of the cost-plus pricing method is its simplicity. Given the proper cost accounting data, computing a product’s final selling price is relatively easy. In addition, because they add a profit onto the top of their companies’ costs, manufacturers are likely to achieve their desired profit margins.
- #24 Figure 11.5 illustrates the cost-plus pricing components.
- #25 One requisite for a successful pricing policy in manufacturing is a reliable cost accounting system that can generate timely reports to determine the costs of processing raw materials into finished goods. The traditional method of product costing is called absorption costing because all manufacturing and overhead costs are absorbed into a finished product’s total cost. A more useful technique for managerial decision making is variable (direct) costing, in which the cost of the products manufactured includes only those costs that vary directly with the quantity produced. When variable costs are subtracted from total revenues, the result is the manufacturer’s contribution margin – the amount remaining that contributes to covering fixed expenses and earning a profit.
- #26 The breakeven price can be found using this equation.
- #27 Service businesses must establish their prices on the basis of the materials used to provide the service, the labor employed, an allowance for overhead, and profit.
- #28 Customers expect businesses to accept multiple payment methods, including credit and debit cards, and mobile payments. In addition, some small companies offer their customers installment credit and trade credit.
- #29 Although customers prefer to use credit cards to make purchases more than any other form of payment, they prefer to use debit cards and cash for smaller daily purchases.
- #31 Fees operate on a multistep process.
- #32 When it comes to online business transactions, the most common method of payment is the credit card. Internet merchants are constantly challenged by the need to provide secure methods for safe, secure online transactions.
- #33 Credit and debit cards account for 72% of all consumer and business payments, and that percentage continues to grow. Small businesses that do not accept credit and debit cards operate at a significant disadvantage compared to their rivals that do. Mobile payments are growing rapidly, particularly among members of the Millennial generation, 44% of whom prefer to pay for goods and services using their phones rather than cash.
- #34 Setting prices is a blend of both art and science. The prices that entrepreneurs set for the products and services they sell are key components in the sales revenue their businesses generate, the profits they earn, and the image they create for their companies.