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CHAPTER 13 LECTURE NOTES

1

Discuss the role of cost and demand factors in setting a price.

PPT 13-1

Chapter 13

Pricing and Credit Strategies

PPT 13-2

Chapter 13

Learning Objectives

PPT 13-3/TM 13-1

The Three Components

of Total Cost Used in Determining Price

[Acetate 13-1]

PPT 13-4/TM 13-2

Cost Structure of a Hypothetical Firm,

1999 and 2000

A.    Setting a price

·      Bring out the importance of pricing by explaining the following two points: (1) one-half of one side of the revenue equation is price! (Sales ´ Price = Revenue) and (2) price has an indirect impact on quantity sold.

1.    Cost determination for pricing

·          Emphasize that careful study of costs may keep a business from pricing too low.

·          Review the behavior of total fixed and total variable costs.

·          Explain the concept of average pricing and highlight its dangers.

2.    How customer demand affects pricing

                a.      The Elasticity of demand (the effect of a change in price on quantity demanded)

·          Elastic demand—an increase in price lowers total revenue.

·          Inelastic demand—an increase in price raises total revenue.

b.     Pricing and a firm’s competitive advantage

·          A product/service that will address unmet needs yields demand.

·          Most products/services are different, but similar products/services can be marketed differently.

·          Product price—using prestige pricing to signal quality, uniqueness.

2

Apply break-even analysis and markup pricing.

PPT 13-5
Break-Even Chart

for Pricing (a)

PPT 13-6
Break-Even Chart

for Pricing (b)

PPT 13-7/TM 13-3

Formulas for Markup
Calculations

[Acetate 13-2]

B.     Applying a pricing system

1.    Break-even analysis

                a.      Cost and revenue relationships—cost break-even analysis is used to determine the quantity at which the product (with an assumed price) will generate enough revenue to start earning a profit.

b.        Incorporating sales forecasts—cost-adjusted break-even analysis is used to evaluate alternative prices by merging cost break-even analysis and the appropriate demand schedules for these alternative prices.

2.       Markup pricing—pricing effects from the involvement of intermediaries

·          A markup on cost differs from a markup on selling price.

·          Converting from one type of markup to the other.

3

Identify specific pricing strategies.

PPT 13-8/TM 13-4

Types of Pricing Strategies

[Acetate 13-3]

C.    Selecting a pricing strategy (seven alternatives):

         1.    Penetration pricing—pricing lower than “normal”

         2.    Skimming pricing—pricing higher than “normal”

         3.    Follow-the-leader pricing—setting the price at the prevailing level

         4.    Variable pricing—making price concessions to different buyers

         5.    Flexible pricing—pricing to reflect special market conditions

         6     Price lining—having a range of distinct prices

         7.    What-the-traffic-will-bear—maximizing price when competition is minor

4

Explain the benefits of credit, factors that affect credit extension, and types of credit.

PPT 13-9/TM 13-5

Benefits of Credit to
Buyers and Sellers

PPT 13-10/TM 13-6

Types of Credit

PPT 13-11/TM 13-7

Commonly Used

Trade Credit Terms

[Acetate 13-4]

D.    Offering credit

·       Remind students of the definition of a market used in Chapter 5 (that is, people with unsatisfied needs and purchasing power).

·      Describe credit as a means of assisting with the purchasing power component of the market.

1.       Benefits of credit

·          Have students identify the benefits of credit for both buyers and sellers.

2.    Factors that affect selling on credit

             a.      Type of business

             b.     Credit policies of competitors

             c.      Income level of customers

             d.     Availability of working capital

3.    Types of credit

                a.      Consumer credit—extended to final consumers  

·         Open charge accounts—indefinite repayment period

·         Installment accounts—for larger purchases

·         Revolving charge accounts—installment accounts with credit limit

b.       Credit cards

·         Bank credit cards (e.g., Visa, MasterCard)

·         Entertainment credit cards (e.g., American Express, Diner’s Club)

·         Retailer credit cards (issued directly by the firm)

·          Poll students to find out which types of credit cards they have.  What do they believe are the advantages and disadvantages of each?

c.        Trade credit

·          Explain the role of trade credit.

·          Review the trade credit terms in Table 13-1.

5

Describe the activities involved in managing credit.

PPT 13-12/TM 13-8

Hypothetical Aging Schedule for Accounts Receivable

PPT 13-13

Federal Regulation of Credit

E.     Managing the credit process

1.    Evaluation of credit applicants

a.     The four credit questions

·          Ask the students to evaluate the statement:  “Every applicant is creditworthy to some degree.”  What is the point of the statement?  Do they agree with it?

b.     The five C’s of credit (character, capital, capacity, conditions, collateral)

2.    Sources of credit information

·          The use of credit histories

·          A firm’s financial statements as a source

·          Pertinent data from outsiders (e.g., other sellers)

·          The customer’s banker as a source

·          Trade-credit agencies (credit information on businesses, not customers)

·          Credit bureaus (credit information on individuals, even on-line)

3.        Aging of accounts receivable

4.        Billing and collection procedures

5.        Credit regulation

·        Review the federal legislation related to credit management.  Ask students to comment on which of these laws they think has had the greatest impact on credit management practices.