Chapter 16 packet notes Flashcards
A specification of what a seller requires in exchange for transferring ownership for use of a product or service.
Price
This causes a loss in revenue.
Prices Set too Low
This also causes a loss in revenue.
Prices Set too High
Related for many goods and services.
Price and Demand
An agreement between a buyer and a seller that provides for delayed payment for a product or service.
Credit
Quantity sold X price per unit = ____ ______
Gross Revenue
- Cost of goods offered
- Selling cost
- Overhead cost
- These three put together equals total cost
The Three Components of Total Cost in Determining Price
The sum of cost of goods sold, selling expenses, and overhead costs.
Total Cost
Costs that vary with the quantity produced or sold.
Variable Costs
Costs that remain constant as the quantity product or sold varies.
Fixed Costs
An approach in which total cost for a given period is divided by quantity sold in that period to set a price.
Average Pricing
The degree to which a change in price affects the quantity demanded.
- Elastic demand
- Inelastic demand
The Elasticity of Demand
Demand that changes significantly when there is a change in the price of the product.
Elastic Demand
Demand that does not change significantly when there is a change in price of the product.
Inelastic Demand
Customers will pay more for a product or service that they percieve as important to their needs.
Pricing and Competitive Advantage
- Setting a high price to convey an image of high quality or uniqueness (competitive advantage)
- Costomers associate price with quality
- Markets with low levels of product knowledge are candidates
Prestige Pricing
A comparison of alternative cost and revenue estimates in order to determine the acceptability of each price.
Break-Even Analysis
Examining revenue-cost relationships: the quantity at which the product will generate enough revenue to start earning a profit.
Steps in the Break-Even Analysis
- Breakeven point
- Contribution Margin
Cost and Revenue Relationships
- The sales volume at which total sales revenue equals total costs (fixed and variable).
- The point at which profitability starts and losses cease.
Breakeven Point
The difference between the unit selling price and the unit variable costs and expenses- for each unit sold, a contribution is made toward covering the company’s fixed costs.
Contribution Margin
- Price has a variable impact and influences demand.
- Adjusting for the indirect effect of price allows for a more realistic profit area to be identified.
Adjusted Breakeven Analysis- Incorporating Sales Forecasts
Cost plus pricing system that adds a markup percentage to cover:
- Operating expenses
- Subsequent price reductions
- Desired profit
Markup Pricing
Markup divided by selling price times 100 =
Markup as Percentage of Selling Price
Markup divided by cost times 100 =
Markup as Percentage of Cost
- Penetration pricing
- Skimming pricing
- Variable pricing
- Price lining
- What the market will bear
- Dynamic pricing
- Follow-the-leader pricing
Pricing Strategies
Selling lower than normal prices to hasten market acceptance of a produce or service or to increase market share.
Penetration Pricing
Setting very high prices for a limited period before reducing them to more competitive levels.
Skimming Pricing
Setting more than one price for a good or service in order to offer price concessions to certain customers.
Variable Pricing
Setting a range of serveral different merchandise price levels.
Price Lining
A strategy for charging the highest prices that customers will pay; used only when the seller has little or no competition.
What the Market Will Bear
Charging more than one price when the customer’s profile suggests that the higher price will be accepted.
Dynamic Pricing
Using a particular competitor as a model in setting prices.
Follow-the-Leader Pricing
- Consider local, state, and federal laws when setting prices: 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.
- If the initial price appears to be off target, make any necessary adjustments and keep on selling.
Setting Prices: Controls and Situations
- 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
Benefits of Credit to Borrowers
- Facilitates increased sales volume.
- Brings a closer association with customers.
- Fosters easier selling through telephone, mail and internet
- Helps smooth sales demand since purchasing power is always available.
- Provides easy access to a tool with which to stay competitive.
Benefits of Credit to Sellers
- Type of business
- Credit policies of competitors
- Competitors re expected to match other competitors’ credit offerings.
- Income level of customers
- Availability of working capital
- Credit sales increase the amount of working capital
Factors that Affect Selling on Credit
- Consumer credit
- Trade credit
Types of Credit (Two Broad Classes of Credit)
Financing granted by retailers to individuals who purchase for personal or family use.
Consumer Credit (Firms Selling to Other Businesses)
Financing provided by a supplier of inventory to a given company which sets up an account payable for the amount.
Trade Credit
Two percent discount on the invoiced amount if paid in full within 10 days of the invoice date, otherwise the full amount of the invoice is due in 30 days.
2/10, net 30
- Open charge account
- Installment account
- Revolving charge account
Types of Consumer Credit Accounts
A line of credit that allows the customer to obtain a product at the time of purchase.
Open Charge Account
A line of credit that requires a down payment, with the balance paid over a specified period of time.
Installment Account
A line of credit on which the customer may charge purchases at any time, up to a pre-established limit.
Revolving Charge Account
- Bank Credit Cards
- Entertainment Credit Cards
- Retailer Credit Cards
Types of Credit Cards (3 Basic Types)
Credit cards issued by banks that are widely accepted by retailers who pay a fee to the banks for handling their credit transactions.
Bank Credit Cards
Business credit cards originally used to purchase services, now widely accepted for merchandise.
Entertainment Credit Cards
Credit cards issued by firms for specific use in their outlets or for purchasing their products or services.
Retailer Credit Cards
- 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?
Evaluation of Credit Applicants
- Character
- Capital
- Capacity
- Conditions
- Collateral
The Traditional Five C’s of Credit
A categorization of accounts receivable based on the length of time they have been outstanding.
Aging Schedule
- Timely notification
- Warning consumers that they may do damage to their credit if they fail to pay.
- Bad debt ratio
Billing and Collection Procedures
One of the most effective collection methods for keeping bills current.
Timely Notification
A number obtained by dividing the amount of bad debts by the total amount of credit sales.
Bad Debt Ratio
