Exam 2 Flashcards
Three market factors in pricing
- Supply influence
- Demand Influence
- Competition Influence
Supply and Demand Influences
Supply Influences
-Supply = availability of a product & substitutes
-Distributors analyze the market
-A booming market → shortages → price increases
-High prices → customers switch to substitutes
-Oversupply → price drops & discounts
Demand Influences
-High demand → shortages → price increases
-Rising prices → customers seek alternatives
-Strong alternatives → reduced demand
-Lower demand → prices normalize or drop
Competition Influences on Pricing
- When service, value, location, & relationships are equal, price decides.
- Customers choose the lowest price.
- Higher-priced distributors must cut prices to compete.
Price vs Value
Value-Based Approach
-Understand customer needs
-Focus on higher margins
-Solve problems & build relationships
Price-Based Approach
-Compete on price
-Accept low margins
-Rely on high sales volume
Reasons why you would take a loss on purpose
- Dead stock
- Loss Leader Strategy
- Gain Market Share
- Price War
To quote a price you need
- The customer
- Item
- Quantity
Pricing in a competitive industry
- Competition limits price increases – plan carefully!
- If increasing price isn’t possible, resist lowering it.
- A strong value proposition justifies higher prices.
- High-maintenance, low-profit customers should pay premium pricing.
Most pricing strategies
- Cost plus
- List down
- Straight column pricing
Buying decision factors
- Location
- Service
- Reputation
- Relationship
- Price
Value-added services
Compliments the product and is viewed by the customer to add value to it
Commodity Products vs Brand Name Products
Commodity Products
- Standardized, common, and widely available
- Small margins due to price competition
- Ordered frequently, customers track prices
- Hard to manage pricing on thousands of SKUs
Brand Name Products
- Recognizable, high variation in quality & design
- Higher margins due to customer preference
- Harder to compare prices across brands
- Premium pricing helps offset low-margin commodity sales
Cost Avoidance (Indirect Savings)
- Does not appear on P&L
- Delays price increases despite market rises
- Negotiates lower prices than initial quotes
- Adds free value (extra services)
- Long-term contracts with price protection
Cost Savings (Direct Savings)
- Appears on P&L as lower COGS/expenses
- Material substitution to reduce costs
- Negotiation savings on purchases
- Better contract terms & rebates from suppliers
What is liquidity
How quickly and easily an asset can be converted into cash without significantly affecting its value
What is accounts receivable
The money that a business is owed by its customers for goods or services that have been delivered or used but not yet paid for
What is accounts payable
The money a business owes to suppliers or vendors for goods or services received but not yet paid for
What is cash flow?
The comparison between money received and
money spent by a business or individual during a defined
period of time
Three cash flow statements
Operational Cash Flow – Cash received or spent as a result of a company’s business activities. (Cash from sales)
* Investing Cash Flow – Cash received or spent through investing activities. (Cash from sale of equipment and investments)
* Financing Cash Flow – Cash received through debt or paid out as debt
repayments.(Cash from issuing stock and getting loans)
Forecasting Methods
Qualitative Methods
- Involves intuition and experience
- Delphi Method: Panel of experts, repeatedly asked
- Sales force composite: Estimates from individual salespersons are reviewed for reasonableness, then aggregated
- Customer Surveys: Ask the customer
Quantitative Methods
- Uses historic data
- Mathematical Techniques
- Time-Series Models and Associative Models
Opportunistic Customers
High profitability
No Relationships
Low Cost to serve
Low volume
We should increase their volume and convert them to the core
Core Customers
High profitability
Sustained Relationship
Low Cost to Serve
High Volume
We should protect these customers and try to penetrate these accounts (get more of their business)
Marginal Customers
Low Profitability
No Real Relationship
High Cost to Serve
Low Volume
We should restructure these accounts or lose them through attrition
Service Drain Customers
Low Profitability
Sustained Relationship
High Cost to Serve
High Volume
We should convert them to the core by trying to reduce expenses
Critical Profit Variables (CPV) What do they tell us?
- Sales Size
- Sales Growth
- Gross Margin Percentage
- Operating Expense Percentage
- Days Sales Outstanding
- Inventory Turnover Ratio
