CHAPTER 10

Pricing Strategies

Copyright © 2011 Pearson Education

Pricing
 Is governed both by art and science.
 Requires balancing a multitude of complex forces.
 Influences every aspect of a small company.
 Is an important signal of a product’s or service’s value to

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customers.
 Involves both math and psychology.
 Price Conveys Image
 Price sends important signals to customers: Quality, prestige,
uniqueness, and others.
 Common small business mistake:
Charging prices that are too low and failing to recognize extra
value, service, quality, and other benefits they offer.

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 Study: Only 15 to 35% of customers consider price to be the chief criterion
when making a purchase.
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

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industry for years.
 Best strategy: Stay out of a price war!
 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

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 Perceived value – determines the price customers are
willing to pay.
 Value is not synonymous with low price.
 Dealing with Rising Costs

 Pass along rising costs

 Explain the reasons behind price increases
 Focus on improving efficiency

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 Consider absorbing cost increases
 Modify the product or service to lower its cost
 Dealing with Rising Costs
(continued)

 Diversify your product line (example : different sizes )

 Anticipate rising costs and try to lock in prices of raw
materials early
 Emphasize the value of your company’s product or

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service to customers
 What Determines Price?
Price Ceiling - What will the market bear?

?
? ? ? ?
?
Acceptable Final Price -

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Price What is the company's ?
Range
? desired "image?" ?

? ? ?
? ?
? ? ?

FIGURE 10.1
Price Floor - What are the company's costs?
 Introducing A New Product

Three Goals:
1. Getting the product accepted
 Revolutionary products

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 Evolutionary products
 Me-too products
2. Maintaining market share as competition grows
3. Earning a profit
Introducing A New Product

3 Basic Strategies:
 Market penetration

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 Skimming
 Life Cycle Pricing
Customized or Dynamic Pricing

A pricing technique in which a company sets

different prices on the same products and services
for different customers using the information that it
collects about its customers.

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Egyptian Vs Foreigners
 Pricing Techniques
 Odd pricing (Phsychological pricing )
 Price lining ( Hyundai )
 Leader pricing ( Market attack low or zero profit )
 Discounts (Markdowns)
Bundling (Combos or computer sets )

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

 Optional-product pricing ( Cameras + Bag + Tripod )

 Captive product pricing ( Gillett Fusion+ Razors )
 Byproduct pricing ( Low value products : Used Banners )
 Suggested retail prices ( Best buy for X $ )
 Follow the Leader Pricing

 Match competitor prices.

 A “me too” pricing policy.
 Robs a company of the opportunity to create a

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distinctive image in its customers’ eyes.
 Below-Market Pricing

 Attract a sufficient level of volume to offset the

lower profit margins.
 Trim operating costs by eliminating extra services
such as:

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 Delivery
 Installation
 Credit granting
 Sales assistance
 Risky!
 Pricing for Manufacturers

 Direct costing and pricing

 Absorption costing
 Variable / direct costing

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 Breakeven
Direct Costing and Pricing

 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.

Copyright © 2016 Pearson 10 - 16

Education Ltd
Break-Even Pricing

Break-even selling price =

Profit + (Variable cost per unit x Quantity produced) + Total fixed cost
Quantity produced

Copyright © 2016 Pearson 10 - 17

Education Ltd
 Consumer Credit

 Credit cards – typical consumer has 4 credit cards.

 Research: Customers who use credit cards make purchases
that are 12% higher than if they had used cash.
 On a typical $100 credit card purchase, cost to business =

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$2.29
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 E-Commerce and Credit Cards

 About 2 percent of online credit card transactions are

fraudulent.
 Steps:
 Use an address verification system
 Require a CVV2 number
 Check customers IP addresses
 Monitor Web site activity with analytics
 Verify large orders
 Post notices on Web site that your company uses anti-fraud
technology
Conclusion

Pricing techniques impact every aspect

of a company including:
 Image
 Customers
 Cash flow
 Profits

Ch. 10: Pricing Strategies 101 -- 21

21
 Video 10 . 1

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 CHAPTER 11
Creating a Successful Financial Plan

Copyright © 2011 Pearson Education

 The Importance of a Financial Plan

 Common mistake among business owners: Failing to collect and

analyze basic financial data.
 Many entrepreneurs run their companies without any kind of financial
plan.
 Only 11% of business owners analyze their companies’ financial
statements as part of the managerial planning process.
 Financial planning is essential to running a successful business and is
not that difficult!

Ch, 11: Creating a Successful Financial Plan 11 - 24

 Basic Financial Statements
 Balance Sheet – “Snapshot.”
Estimates the firm’s worth on a given date;
built on the accounting equation:
Assets = Liabilities + Owner’s Equity
 Income Statement – “Moving picture.”
Compares the firm’s expenses against its revenue over a period of time to
show its net income (or loss):
Net Income = Sales Revenue - Expenses
 Statement of Cash Flows – Shows the change in the firm's working
capital over a period of time by listing the sources and uses of funds.

Ch, 11: Creating a Successful Financial Plan 11 - 25

Creating Projected Financial Statements

 Helps the entrepreneur transform business goals into reality

 Challenging for a business start-up
 Start-ups should focus on creating projections for two years
 Projected financial statements:
 Income statements
 Balance sheet

Ch, 11: Creating a Successful Financial Plan 11 - 26

Customer Profitability Map

Copyright © 2016 Pearson Education 11 - 27

Ltd
Steps to Create Financial plan
Determine
Your Current
Financial
Situation

Reevaluate and
Develop
Revise Your
Financial Goals
Plan

Create and Identify

Implement a Alternative
Financial Courses of
Action Plan Action

Evaluate
Alternatives

1 - 28 Ch. 1: The Foundations of

Entrepreneurship
Step 1:
Determine Your Current Financial Situation
 Determine your current financial situation with regard to
income, savings, living expenses, and debts.

 Preparing a list of current asset and debt balances and

amounts spent for various items gives you a foundation
for financial planning activities.

1 - 29 Ch. 1: The Foundations of

Entrepreneurship
Step 2 :
Develop Financial Goals
 Periodically analyze your financial values and goals. This involves identifying
how you feel about money and why you feel that way.

 The purpose of this analysis is to differentiate your needs from your wants.

 Specific financial goals are vital to financial planning. Others can suggest
financial goals for you; however, you must decide which goals to pursue.

 Your financial goals can range from spending all of your current income to
developing an extensive savings and investment program for your future
financial security.

1 - 30 Ch. 1: The Foundations of

Entrepreneurship
 Step 3 :
Identify Alternative Courses of Action

 Developing alternatives is crucial for making good

decisions. Although many factors will influence the
available alternatives, possible courses of action usually
fall into these categories:
 Continue the same course of action.
 Expand the current situation.
 Change the current situation.
 Take a new course of action.

Not all of these categories will apply to every decision situation;

however, they do represent possible courses of action.
1 - 31 Ch. 1: The Foundations of
Entrepreneurship
 Step 4 :
Evaluate Alternatives
 You need to evaluate possible courses of action, taking into consideration your life situation,
personal values, and current economic conditions.

 Consequences of Choices. Every decision closes off alternatives.

 For example, a decision to invest in stock may mean you cannot take a vacation. A decision
to go to school full time may mean you cannot work full time.

 Opportunity cost is what you give up by making a choice. This cost, commonly referred to
as the trade-off of a decision, cannot always be measured in dollars.

 Evaluating Risk : Uncertainty is a part of every decision.

 In many financial decisions, identifying and evaluating risk is difficult. The best way to consider
risk is to gather information based on your experience and the experiences of others and to
use financial planning information sources.

1 - 32 Ch. 1: The Foundations of

Entrepreneurship
Step 5 :
Create and Implement a Financial Action Plan

 Develop an action plan. This requires choosing ways to achieve your goals.
As you achieve your immediate or short-term goals, the goals next in
priority will come into focus.

 To implement your financial action plan, you may need assistance from
others. For example, you may use the services of an insurance agent to
purchase property insurance or the services of an investment broker to
purchase stocks, bonds, or mutual funds.

1 - 33 Ch. 1: The Foundations of

Entrepreneurship
 Step 6 :
Reevaluate and Revise Your Plan
 Financial planning is a dynamic process that does not end when you take a
particular action.

 You need to regularly assess your financial decisions. Changing personal,

social, and economic factors may require more frequent assessments.

 When life events affect your financial needs, this financial planning process
will provide a vehicle for adapting to those changes.

 Regularly reviewing this decision-making process will help you make

priority adjustments that will bring your financial goals and activities in line
with your current life situation.

1 - 34 Ch. 1: The Foundations of

Entrepreneurship
Table 11.1 How Lenders View Liquidity and Leverage
Liquidity
If chronic, this is often evidence of
mismanagement. It is a sign that the owner
has not planned for the company's working
Low capital needs. In most businesses
characterized by low liquidity, there is
usually no financial plan. This situation is
often associated with last minute or "Friday
night" financing.
This is an indication of good management.
The company is using its current assets
wisely and productively. Although they may
Average not be impressed, lenders feel comfortable
making loans to companies with adequate
liquidity.
Some lenders look for this because it
indicates a most conservative company.
However, companies that constantly
High operate this way usually are forgoing growth
opportunities because they are not making
the most of their assets.
Ch, 11: Creating a Successful Financial Plan
11- 35 from David H. Bangs, Jr., Financial Troubleshooting,
Source: Adapted Upstart Publishing Company, (Dover, New Hampshire, 1992), p. 124.
Leverage
This is a very conservative position. With
this kind of leverage, lenders are likely to
lend money to satisfy a company's capital
needs. Owners in this position should have
no trouble borrowing money.
If a company's leverage is comparable to
that of other businesses of similar size in
the same industry, lenders are comfortable
making loans. The company is not
overburdened with debt and is
demonstrating its ability to use its
resources to grow.
Businesses that carry excessive levels of
debt scare most lenders off. Companies in
this position normally will have a difficult
time borrowing money unless they can
show lenders good reasons for making
loans. Owners of these companies must
be prepared to sell lenders on their ability
to repay.
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Putting Your Ratios to the Test
When comparing your company’s ratios to your industry’s standards,
ask the following questions:

1. Is there a significant difference in my company’s ratio

and the industry average?
2. If so, is this a meaningful difference?

3. Is the difference good or bad?

4. What are the possible causes of this difference?

What is the most likely cause?
5. Does this cause require that I take action?

6. If so, what action should I take to correct the problem?

Source: Adapted from George M. Dawson, “Divided We Stand,” Business Start-Ups, May 2000, p. 34.

Ch, 11: Creating a Successful Financial Plan 11 - 36

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Breakeven Analysis
 Breakeven point - the level of operation at which a
business neither earns a profit nor incurs a loss.

 A useful planning tool because it shows entrepreneurs

minimum level of activity required to stay in business.

 With one change in the breakeven calculation, an

entrepreneur can also determine the sales volume
required to reach a particular profit target.

Ch, 11: Creating a Successful Financial Plan 11 - 37

Conclusion
 Preparing a financial plan is a critical step
 Entrepreneurs can gain valuable insight through:
 Pro forma statements
 Ratio analysis
 Breakeven analysis

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