03 Nov Using the textbook, Strayer Library, and the Bachelor of Business Administration Library Guide, analyze pricing strategies for established products and services. Next, select and explain
Please respond to the following:
- Using the textbook, Strayer Library, and the Bachelor of Business Administration Library Guide, analyze pricing strategies for established products and services. Next, select and explain the pricing strategy you would use for a business. Within your response, you should also identify two objectives this strategy seeks to achieve.
Chapter Eleven Small Business Pricing, Distribution, and Location
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Pricing
Your fundamental goal should be setting the optimum price.
There are four key factors for determining an optimum price.
Demand for the product or service.
Value delivered to the customer.
Prices set by competing firms.
Your business strategy and product placement.
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The Fundamentals of Pricing: Margin Pricing
Markup pricing is likely the most widely used pricing method – knowing your costs and the markup is a fundamental pricing concept.
T-shirt cost $3.00.
Equipment, ink, time $2.50.
Marketing costs .50.
Selling price $20.00.
Your markup is $14.00.
As a percentage ($14.00/6.00) 233%.
Your margin ($14.00/20.00) 70%.
How many T-shirts do you need to sell if you need $541 sales/day to meet your magic number?
28 T-shirts a day.
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The Fundamentals of Pricing: Elasticity
If dropping the price increases sales, this is price elasticity.
Essential products with no substitutes are inelastic products.
Elastic products have many substitutes.
Here is where the law of supply and demand relates to business.
When supply is adequate, prices are stable.
If supply shrinks, prices go up.
If demand suddenly grows, prices are likely to go up.
Reasonable increases are expected, but beware of price gouging.
As an entrepreneur, you can adjust your prices based on supply and demand, but also keep an eye on the competition.
To make elasticity work, keep in mind the value people see in your product.
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Figure 11.1: Pricing Elasticity
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The Fundamentals of Pricing: Value
We know people will pay more for a product of quality or stylishness or leading-edge technology, and your product can have the same appeal.
Screaming Eagle wines deliberately limits its production of high-end wine and sells each bottle for $850 through subscription.
The extravagant price is part of what creates and maintains demand.
In addition to demand and value provided, consider competitor prices.
If you price below competitors, your revenue declines as a percentage of total sales and competitors will likely drop their prices to match you.
If you price higher than competitors without providing greater perceived value, this can only lead to lower overall volume.
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The Fundamentals of Pricing: Contextual Factors
Your company objectives.
When starting out, maximizing profits is better than increasing market share, as competing on price may lead to negative growth.
Marketing strategy.
Your price must be consistent with your marketing strategy.
Channels of distribution.
Everyone who handles the product expects to make something, which increases the price through price escalation.
Competition.
When comparing price, compare matches in product bundles.
Legal and regulatory issues.
Talk to your accountant and attorney for specific rules of your product.
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The Pricing Toolbox: Pricing Psychology – How Customers Perceive Prices
As a consumer, if your needs change, your willingness to pay changes.
A consumer’s internal reference pricing is their own knowledge, while their external reference pricing is gathered from other sources.
Perception of value varies from person to person.
Expectations of future prices may be internal or external.
Consumers also have a price range of acceptability.
Setting a price somewhat above the competitive midpoint has a psychological impact on buyers.
How you define your product determines your competitive advantage and affects your price.
Customers attracted to low prices will not be loyal.
Customers will always pay more for a product/service that stands out.
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The Pricing Toolbox: Pricing Strategies
Skimming charges the highest price the market will bear.
Prestige pricing is used for status symbol items, while premium pricing is used for non-status symbol items.
Odd-even pricing just means a price ending with a 9, 7, or 5.
Partitioned pricing charges a base price plus extra for all components, and captive pricing sells a base system at a low cost then sets a high price for expendables.
Price lining attempts to appeal to several different markets.
Price lowering techniques include periodic discounting and random discounting.
Another example is off-peak pricing.
Bundling offers a lower price for combination purchases.
A variation of this is selling multiple or bonus packs.
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Pricing Strategy Wrap-Up
Entrepreneurs agonize about price, but perhaps for the wrong reason.
Owners figure a small business should have smaller prices, but this thinking is dangerous and could lead to business failure.
Goal number one is to set the price as high as you think you can, using your competition and customers’ responses as a check.
If higher prices are working but sales have tapered off, consider pursuing goal number two – use pricing strategies to drive sales.
The secret is in understanding the market, the cost of doing business, and the prices your customers are willing to pay.
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Sales Promotions
Sales promotions are a form of communication that encourages the customer to take immediate action.
Discounting techniques like coupons, rebates, discounts, buy-one-get-one promotions, and regular sales.
Introductory techniques like giveaways, samples, and tastings help introduce your offering to potential customers for future purchase.
Contest techniques like sweepstakes, contests, and games introduce your brand to customers without an immediate call to purchase.
Loyalty techniques like a referral discount, social media likes, and customer loyalty programs increase the stickiness of your brand.
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Distribution
Distribution is the process of getting your product to the customer.
Channels are important to your marketing strategy and profits.
They differ in number of intermediaries.
Each intermediary wants to make a profit.
As the manufacturer, you have the ability to set the manufacturer’s suggested retail price.
Selling directly to consumers is called direct sales and is part of direct marketing.
Due to the math of intermediaries, direct marketing is attractive.
Direct sales can be the most profitable way to make sales.
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Direct Marketing
Direct marketing is relatively inexpensive and provides control over where your product goes, consumer information, product use, and pricing.
Word of mouth.
Direct sales can take several forms – industrial, door-to-door, party sales, vending.
Direct mail includes mail orders etc. and may use microinventory or just-in-time (JIT) inventory.
Telemarketing and inbound telemarketing.
Direct response advertising has different costs for different forms.
Guerrilla marketing is unusual and nearly free advertising.
Multichannel marketing uses several outlets to contact customers.
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Distribution Issues for Direct Marketing
Even when shippers pay postage, you need to know the rates.
Charge a shipping and handling fee that includes postage and packaging materials.
In addition to costs, you must pick which service to use – some offer tracking and insurance, pickup and provide delivery times.
A wholesaler, retailer, and an agent are all intermediaries who get the product to the end consumer for a percentage of the profits.
Fulfillment centers warehouse the retailer’s products and ship them and may service several retailers or e-tailers.
Try to determine which wholesalers or distributors are right for you.
Attend trade shows to identify distributors.
Get your product listed in a catalog.
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International Strategies
Once a company has a website it becomes a born international.
Are we ready to export?
Direct exporting sells to foreign buyers but may get help from freight forwarders.
Indirect exporting uses agents, export managers, or trading companies.
Where should we go?
A safe bet is similar countries, like Canada.
Whom do we contact there?
There are many ways to make contact.
Use letters of credit or documentary drafts as ways of receiving payment.
When importing, look for products selling well but not available in the U.S.
When importing, paperwork and insurance details will be the source’s responsibility.
Be sensitive to cultural differences.
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Location
Anyone can tell you the three most important things for your business is “Location, location, location.”
The first choice is your hometown, convenient and familiar.
You have a banker, you know the market, and have customer leads.
There may be compelling reasons to consider a different location.
Your local business and zoning laws may be a hindrance.
The cost of doing business may be unfavorable – wage rates, etc.
Your hometown may not hold your target customers.
You may needed skilled labor that is unavailable locally.
Your hometown may be appropriate, but remember that moving a company is very costly – so plan ahead.
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Location – Service Firms
At the Client’s Location.
Typically house cleaning, pest control, remodeling, lawn services, etc.
Headquarters can be a home office, which you may outgrow.
You will need reliable transportation and a central location.
Mutually Accessible Location.
Typically barbershops, dentist offices, and restaurants.
A service like watch repair could also be home-based.
Remote Location.
Typically medical transcription, data processing, fulfillment centers, and some consulting work.
Meetings with clients face-to-face is infrequent.
Locations can be anywhere in the world.
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Location – Manufacturers
Where you make the product is really dependent on the product.
If no specialized equipment is needed, at home may work.
Zoning ordinances may prohibit manufacturing in residential areas.
One trend is rentable manufacturing spaces.
Contract manufacturing might be a better option, for a while.
Sheltered workshops exist in most states and offer competitive pricing, often with tax benefits for the business.
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Location – Site Selection
High Customer Contact Businesses.
Such as medical or legal offices, restaurants, dry cleaners, etc.
Select a site convenient to your target market.
Consider if there are traffic generators in the area.
Automobile traffic is another consideration, and parking.
Low Customer Contact Businesses.
Such as manufacturing, headquarters, or remote location services.
Employee access is more critical than customer access.
Space in a business park may be appropriate.
Some cities offer empowerment zones, or use a business incubator.
A variant of the incubator is an accelerator.
Some locales have co-working spaces available.
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Location – Leasing
A start-up rarely buys its first location as it is too expensive.
Start looking for a leased location and narrow your choices to a few.
Some issues include: “as is” versus compliant property, HVAC, and signage.
Other issues include: hidden charges, use of premises, non-compete clauses, hours of operation, rent default, and moves or remodels.
Prepare for the good and bad – if your business falters, you still must pay the lease.
One way to handle early termination is subleasing.
Other ways include a bailout clause, a “cap” on paying rent, or a co-tenancy clause.
All issues need to be negotiated at the start
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Location – Build, Buy, or Lease
Building has the advantage of a perfect layout in the perfect location with street appeal, but it is costly and slow.
Buying a place shortens the time and may be cheaper, but any needed remodeling may eat the savings away.
In both cases, business owners have an asset, a tax advantage, and the flexibility to make changes and know their long-term costs.
Leasing has a lower initial cash outlay and provide a deductible business expense, but flexibility is limited and costs increase.
The issues of location and distribution are ones made only occasionally.
Done right, managing the issues of location and distribution can turn an average firm into a major success.
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Location – Layout
The layout of a potential site must be considered carefully.
Determine if the building setup is appropriate for your use.
Consider the amenities that are already there.
Check the exterior too, making sure everything meets code.
Once the building is selected, decide how to lay out the interior.
Layouts should eliminate unnecessary employee movement and yet say something about who you are.
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Layout – Manufacturing
Generally, manufacturing processes are laid out in one of two formats: production line layout and process layout.
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Layout – Retail Operations
There are two traditional layouts for retail operations: the grid layout and free-form layout.
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Accessibility Content: Text Alternatives for Images
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Figure 11.1: Pricing Elasticity – Text Alternative
These side-by-side supply and demand graphs show the demand changes for elastic and inelastic products for different prices. For both graphs, quantity is measured on the horizontal axis and price on the vertical axis.
In the first graph, showing elastic T-shirt sales, when the price is $20, sales are at one and when the price drops to $10, sales double to two. A fifty percent increase in quantity.
In the second graph, showing inelastic gasoline sales, when the price is $20, this pays for 150 miles of driving, but at $10 it only pays for 200 miles of driving, a 25 percent increase in quantity. This is half of elastic product’s increase.
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Layout – Manufacturing – Text Alternative
There are two layouts depicted – the production layout and the process layout, both contained within a rectangular shape.
The production layout example shows receiving docks at the top of the layout and three parallel work lines. Each work line has five work stations with work passing from one station to the next. At the bottom, or opposite end, of the layout is the shipping docks.
In the process layout the same shape is broken into seven areas: milling machines, drill presses, planing, assembly, painting, packaging and shipping, and finishing process. Assembly takes place in the middle of the space, surrounded by milling machines, drill presses, planing, and painting. The packaging and shipping section is located adjacent to the finishing processes section.
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Layout – Retail Operations – Text Alternative
There are two layouts depicted – the production layout and the process layout, both contained within a rectangular shape showing the store front at the bottom of the depiction.
In the grid layout for a grocery store, along all sides are three sections: the dairy section along the left-hand wall, the meat section along the back wall and the produce section along the right-hand wall. The middle section has three long rectangular isles down the middle.
The free-form layout depicted here is just one example of any number of combinations, this store is a clothing store. The two back corners of the store are cut off diagonally and contain shoes in one corner and belts in the other. The left wall holds accessories and the right-hand wall is the underwear displays. The very middle of the store has a sportswear section. The remaining area contains four smaller rectangular sections, likely racks, for shirts, jeans, and two racks of dresses.
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Chapter Twelve Small Business Accounting: Projecting and Evaluating Performance
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Why Accounting Is Important for Small Business Success
There are several reasons.
You must provide specific accounting information in order for investors to consider funding your concept.
Bankers require formal financial statements for any type of loan.
You cannot fully know your business without accounting information.
Planning and controlling require accounting information.
There are three types of accounting you will need in your business.
Financial accounting is formal, rule-based accounting principles.
Managerial accounting is intended for planning, directing, and controlling a business.
Tax accounting is based on governmental requirements.
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Financial Accounting
Financial accounting is based on a set of rules called generally accepted accounting principles (GAAP) and reports:
How profitable the business is.
The value of the firm’s assets and who has claim to that value.
How much and from where money was received and how much and to whom money was paid.
These three financial reports are called the:
Income statement.
Balance sheet.
Statement of cash flows.
Each report contains information on things that have already happened.
Financial accounting does not have a lot of value for running the day-to-day activities of a business.
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Managerial Accounting
Managerial accounting is forward-looking where financial accounting is concerned only with the past.
There are no formal rules with the only issue being what is valuable.
One of the most valuable functions of managerial accounting is planning for future business activities.
This is done through standard budgeting or profit planning.
This method of organizing and formatting business planning is called pro forma financial statements.
The result is a detailed plan for future operations and is the standard against which actual results are compared to assess performance.
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Tax Accounting
Tax accounting follows the tax laws and regulations.
The final product is a set of returns, forms, and schedules.
There are many different business taxes including:
Federal income tax.
State income tax.
Employment taxes.
Inventory tax.
Excise taxes.
Various use taxes including sales tax and, in some countries, value-added tax.
The primary value of tax accounting is to avoid penalties for non-compliance and to legally minimize tax payments.
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The Concepts That Make Accounting Work
The assumptions that underlie accounting are very basic.
A business is an entity that is separate from its owners – business entity concept.
An operating business will continue in business – going concern concept.
Accounting information is valuable only if it is useful for the owners and managers of the business.
Creditors (lenders and suppliers) have claim on business assets that must be satisfied before any claim of an owner.
The claims of creditors and owners cannot be greater in total than the asset value of a business – called the accounting equation.
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The Accounting Equation
Assets = Liabilities + Owners’ equity
If a business is an entity existing apart from its owners, then the value of the business is the sum of the values of everything the business owns.
The name for what a business owns is asset.
Owners do not own the assets, the business itself owns them.
The owners have a claim on the assets of the business and this claim is called owner’s equity.
Courtesy of Natalie Gamez Meyer
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The Balance Sheet
The balance sheet entry to report the equity transaction between the owner and Red Jett Sweets would look like this.
Liabilities are legally enforceable future obligations.
Access text alternative for this image.
Total assets ($73,000) is exactly equal to the sum of the claims of the creditors and the owners.
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Cost, Revenues, and Expenses
Red Jett purchases raw materials for $2,040 on account, then bakes and sells 3,000 cupcakes at $2.75 each on account.
No cash changes hands.
Red Jett incurred an expense, called cost of goods sold of $2,040 and realized a revenue of $8,250.
The difference between the revenue and the expense is a profit of $6,210, reported on the balance sheet as retained earnings.
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