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Ch. 10 Pricing and Credit Strategies

by: Alora Lornklang

Ch. 10 Pricing and Credit Strategies MGMT 3850

Marketplace > University of North Texas > Entrepreneurship > MGMT 3850 > Ch 10 Pricing and Credit Strategies
Alora Lornklang
GPA 3.5

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About this Document

These notes will cover the learning objectives and vocabulary from Chapter 10 of the textbook
Foundations of Entrepreneurship
Brandi Everett
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This 5 page Class Notes was uploaded by Alora Lornklang on Monday March 28, 2016. The Class Notes belongs to MGMT 3850 at University of North Texas taught by Brandi Everett in Spring 2016. Since its upload, it has received 122 views. For similar materials see Foundations of Entrepreneurship in Entrepreneurship at University of North Texas.


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Date Created: 03/28/16
MGMT 3850 Foundations of Entrepreneurship Ch. 10: Pricing and Credit Strategies LO1: Discuss the relationships among pricing, image, competition, and value. Price conveys image  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.   Many entrepreneurs make the common pricing mistake of failing to recognize the extra value,  convenience, service, and quality they give their customers—all things that many customers are  willing to pay for.   “If you lower price, it makes it seem like you lower value and quality and that is a dangerous cycle that can destroy a business.”  The relationship between value and price with the following conceptual equation: o (S+P)/D > $ +E  o S = Company’s standards of doing business o P= Product or service quality and performance o D= Doubt in customers’ minds that detract from the value of the company’s standards  and products or services o $ Product or service price o E=Customer’s expectations of a company and its products and services  A key ingredient to setting prices properly is to understand a company’s target market: the  customer groups at which the small company is aiming its goods or services.  Competition and Prices  When setting prices, entrepreneurs must take into account their competitors’ prices, but the  decision to match or beat them is NOT automatic.   A company’s pricing policies involve more than covering expenses and generating a profit; they  also tell an important story about its position in the marketplace and the extra value it offers  customers.   Unless a small company can differentiate itself by creating a distinctive image in customers’  minds or by offering superior service, quality, design, convenience, or speed, it must match its  competitors’ prices or risk losing sales.  Entrepreneurs must monitor competitor’s prices on products that are identical to or that are close  substitutes for those they sell and strive to keep their prices in line with them   An entrepreneur can create a low­cost advantage by  o Choosing a low­cost location o Minimizing operating costs by maximizing efficiency o Exercising tight control over inventory and restricting product lines to those items that  turn over quickly.  o Providing customers with no or limited service  o Using low­cost, bootstrap marketing techniques o Selling basic products but offering customers the option of purchasing additional product  or service features that generate higher profit margins o Achieving high sales volume that allows the business to spread its fixed costs across a  large number of units.   Focus on Value  o Customers see perceived value, which determines the price they are willing to pay for it.  o Businesses that underprice their products and services or constantly run special discount  price promotions may be short­circuiting the value proposition they are trying to build  and communicate to their customers.  o Techniques that companies can use to increase customer’s perception of value and,  essentially lower their prices with less risk of diminishing their brands, include offering  coupons and rates that are not as closely connected to the product as direct price cuts.   Fighter brand  o A less expensive, no=frills version of a company’s flagship product that is designed to  confront lower­priced competitors head­on, satisfy the appetites of value­conscious  customer and preserve the image of the company’s premium product.   Companies can influence perception of value through marketing and other efforts.   Businesses facing rapidly rising costs in their business should consider the following strategies:  o Communicate with customers  o Rather than raise the price of the good or service, include a surcharge.  o Eliminate customer discounts, coupons, and promotions.  o Offer products in smaller sizes or quantities.  o Focus on improving efficiency everywhere in the company o Emphasize the value your company provides to customers o Raise prices incrementally and consistently rather than rely on large periodic increases o Shift to less expensive raw materials if possible o Anticipate rising materials costs and try to lock in prices early o Consider absorbing cost increases o Modify the product or service to lower its cost.  o Differentiate your company and its products and services from the competition.   Setting prices with the emphasis on value is more important than trying to choose the ideal price  for the product.  LO2: Describe effective pricing techniques for introducing new products or services and for existing ones. Introducing a New Product  When pricing any new product, the owner should try to satisfy three objectives:  o Get the product accepted  Revolutionary products   Products that are so new and unique that they transform existing  markets  Evolutionary products   Products that offer upgrades and enhancements to existing products  Me­too products   Products that offer the same basic features as existing products on the  market.  o Maintain market share as competition grows  If a new product is successful, competitors will enter the market, and the small  company must work to expand or at least maintain its market share o Earn a profit   Entrepreneurs should not introduce a new product at a price below cost because  it is much easier to lower a price than to increase it once the product in on the  market.   Entrepreneurs have three basic strategies to choose from when establishing a new product’s price:  penetration, skimming, and life cycle pricing.   Penetration  o To gain quick acceptance and extensive distribution in the mass market, some  entrepreneurs introduce the product at a low price.   Set the price just above the cost to develop a wedge in the market and quickly  achieve a high volume of sales.   Skimming  o Often used when a company introduces a new product into a market with little or no  competition or to establish the company and its products or services as unique and  superior to those of its competitors.  o With this strategy, an entrepreneur uses a higher­than­normal price in an effort to quickly recover the initial developmental and promotional costs of the product.   Life Cycle Pricing  o A variation of skimming o A small company introduces a product at a high price. Then technological advances  enable the firm to lower its costs quickly and to reduce the product’s price before its  competition can.  o Assumes competition will emerge over time Pricing Established Goods and Services  Odd pricing o A pricing technique to set prices that end in odd numbers to create the psychological  impression of lower prices  Price lining o A technique that greatly simplifies the pricing decision by pricing different products in a  product line at different price points, depending on their quality, features, and cost.   Freemium pricing  o A pricing strategy that involves providing a basic product or service to customers for free but charging a premium for expanded or upgraded versions of the product or service   Dynamic (customized) pricing o A technique in which a company sets different prices for the same products and services  for different customers using the information they have collected about their customers  Leader pricing  o A technique that involves marking down the normal price of a popular item in an attempt  to attract more customers who make incidental purchases of other items at regular prices.   Zone pricing  o A technique that involves setting different prices for customers located in different  territories because of different transportation costs.   Delivered pricing o A technique in which a company charges all customers the same price regardless of their  locations and different transportation costs.   F.O.B. factory o A pricing method in which a company sells merchandise to customers on the condition  that they pay all shipping costs.   Discounts (markdowns) o Reductions from normal list prices  Earned discounts  o Discounts customers earn by making repeat purchases at a business.  Limited time offers (LTOs) o Discounts retailers run for a limited amount of time with the goal of creating a sense of  urgency and excitement among customers  Steadily decreasing discount (SDD)  o A limited duration discount that declines over time   Multiple unit pricing o A technique offering customers discounts if they purchase in quantity.   Bundling  o Grouping together several products or services or both into a package that offers  customers extra value at a special price.   Optional­product pricing o A technique that involves selling the base product for one price but selling the options or  accessories for it at a much higher markup.   Captive­product pricing o A technique that involves selling a product for a low price and charging a higher price for the accessories that accompany it.   By­product pricing o A technique in which a company uses the revenues from the sale of by­products to be  more competitive in pricing the main product.   Suggested Retail prices o Small business owners frequently follow suggested retail prices to eliminate pricing  decisions but the price may not be compatible with their desired image, competitive  situation, or the company’s cost structure  Follow­the­leader pricing o Entrepreneurs should monitor their competitors’ pricing policies and individual prices by  reviewing their ads or by hiring part­time or full­time comparison shoppers LO3A: Explain the pricing methods and strategies for retailers.  Markup (markon) o The difference between the cost of a product or service and its selling price.   Dollar Markup = Retail price – cost of merchandise  Percentage (of retail price) markup = (dollar markup/retail price)  Percentage (of cost) markup = (dollar markup/cost of unit)  Initial dollar markup = (operating exp + reductions + profit)/ (Net sales +reductions) LO3B: Explain the pricing methods and strategies for manufacturers  Cost­plus pricing o A pricing technique in which 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.   Absorption costing o The traditional method of product costing in which all manufacturing and overhead costs  are absorbed into the product’s total   Variable (direct) costing  o A method of product costing that includes in the product’s cost only those cost that vary  directly with the quantity produced  Contribution margin  o She amount left over out of a dollar of sales after variable expenses are paid that  contributes to covering fixed expenses and earning a profit   Contribution percentage = 1 – (variable expenses/ revenues)  Total variable cost = Material + DL +variable factory overhead  Break­even selling price = (Profit + (variable cost per unit x Qty produced) + Total fixed cost) /  Quantity produced   Pocket price o The price of a company receives for a product or service after deducting all discounts and purchase incentives L03C: Explain the pricing methods and strategies for service firms.  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.   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.  LO4: Describe the impact of credit on pricing  Offering consumer credit enhances a small company’s reputation and increases the probability,  speed, and magnitude of customer’s purchases. Small firms offer three types of credit: credit  cards, installment credit, and trade credit (charge accounts)  Small businesses that fail to offer credit to their customers lose sales to competitors who do.   Interchange fee o The fee banks collect from retailers whenever customers use a credit or debit card to pay  for a purchase.   Mobile wallet  o Applications that link a smart phone or tablet to a credit or debit card, transforming the  device into a digital wallet


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