Small Business Management, 18e: Longenecker/Petty/Palich/Hoy

Longenecker/Petty/Palich/Hoy
Longenecker/Petty/Palich/Hoy
Small Business
Management, 18e
© 2017 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
Pricing and Credit
Decisions
Chapter 16
© 2017 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.
Learning Goals:
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.
© 2017 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.
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
© 2017 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
16–4
16–4
certain product or service or otherwise on a password-protected website for classroom
Setting a Price
Credit
An agreement between a buyer and
a seller that provides for delayed
payment for a product or service.
16–5
16–5
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.
16–6
16–6
Cost Determination for
Pricing (cont.)
Average Pricing
An approach in which total cost for a
given period is divided by quantity
sold in that period to set a price.
16–7
16–7
16.1 Cost Structure of a Hypothetical Firm,
2013
© 2017 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.
16.2 Cost of Structure of a Hypothetical Firm,
2014
Average pricing overlooks the

reality of higher average costs at
lower sales levels
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.
16–10
16–10
How Customer Demand
Affects Pricing (cont.)
Elasticity of Demand (cont.)
Inelastic Demand
Demand that does not change
significantly when there is a
change in the price of the product.
16–11
16–11
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).
16–12
duplicated, in whole
Customers associate price with quality.
16–12
or in part, except for use as permitted in a license distributed with a
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.
total fixed costs and expenses
Break-even
= selling price – unit variable costs and expenses
units sold
16–13
16–13
(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.
16–14
16–14
(cont’d)
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.
16–15
16–15
16.3 Break-Even Graphs for Pricing
units
16.4 A Break-Even Graph Adjusted for Estimated
Demand
(cont’d)
Markup Pricing
Cost plus pricing system that adds
a markup percentage to cover:
Operating expenses
Subsequent price reductions
Desired profit
Markup
100  Markup as a percentage of selling price
Selling Price
Markup
100  Markup as a percentage of cost
Cost
Retail adage: Markup on purchased cost, markdown on
selling
© 2017 Cengage Learning. All Rights Reserved. May not priceor
be copied, scanned,
16–18
16–18
Selecting a Pricing Strategy
Penetration
Penetration
Pricing
Pricing
Skimming
Skimming Follow-the-
Follow-the-
Pricing
Pricing Leader
Leader Pricing
Pricing
Pricing
Variable
Variable Strategies Dynamic
Dynamic
Pricing
Pricing Pricing
Pricing
What
What the
the Market
Market
Price
Price Will
Will Bear:
Bear:
Lining
Lining Adaptive
Adaptive Pricing
Pricing
© 2017 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
(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.
16–20
16–20
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
16–21
16–21
Selling on Credit
Factors
Factors that
that Affect
Affect
Selling
Selling on
on Credit
Credit
Credit
Credit Availability
Availability
Type
Type of
of Income
Income level
level Economic
Economic
policies
policies of
of of
of working
working
business
business of
of customers
customers conditions
conditions
competitors
competitors capital
capital
© 2017 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.
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,
16–23
16–23 otherwise the full invoice amount is due in 30
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.
16–24
16–24
Types of Consumer Credit
Accounts (cont.)
Revolving Charge Account
Is a line of credit on which the
customer may charge purchases at
any time, up to a pre-established
limit.
16–25
16–25
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
16–26
16–26
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?
16–27
16–27
Managing the Credit
Process (cont.)
The Traditional Five C’s of Credit
Character
Capacity
Capital
Collateral
Conditions
16–28
16–28
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
16–29
16–29
16.5 Hypothetical Aging Schedule for Accounts
Receivable
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
16–31
16–31
amount of credit sales.
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
16–32
16–32
Key
freemium strategy
Terms
aging schedule
inelastic demand
average pricing
installment account
bad-debt ratio
markup pricing
break-even analysis
open charge account
break-even point
penetration pricing strategy
consumer credit
prestige pricing
contribution margin
price
credit
price lining strategy
credit bureaus
price skimming
credit card
product line pricing
debit card
revolving charge account
elastic demand
trade-credit agencies
elasticity of demand
value
follow-the-leader pricing
strategy variable pricing strategy
© 2017 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.

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Average pricing overlooks the

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