5.02 Calculating Prices

11. Law of supply and demand: Economic principle which states that the supply of a good or service will increase when demand is great and decrease when demand is low 12. Market price: Actual price that prevails in a market at any particular moment 13. Market share: An organization’s portion of the total industry sales in a specific market 14. Mark-up: The difference between the cost of a product and its selling price 15. Maturity stage: The product life cycle stage in which sales peak and then increase at a slower rate or start to decline 16. Monopolistic competition: A type of market structure in which a lot of businesses sell similar products that have only a few differences 17. Obsolescence: The state of being outmoded or unfashionable 18. Oligopoly: A market structure in which there are relatively few sellers, and industry leaders usually determine prices 19. Operating expenses: All of the expenses involved in running a business 20. Price discrimination: An illegal activity in which a business charges different customers different prices for similar amounts and types of products Vocab Warm-Up – Wednesday, May 21st 1. Bait-and-switch advertising: Promoting a low-priced item to attract customers to whom the business then tries to sell a higher priced item 2. Business cycles: Periods of expansion and contraction in economic activities 3. Capital: Assets of a business 4. Cash flow: The movement of funds into and out of a business; determines the amount of cash the business has to work with at any given time 5. Costs: The expenses involved with manufacturing, promoting, and distributing a product 6. Elastic demand: A form of demand for products in which changes in price correspond to changes in demand 7. Fixed costs: Business costs that are not affected by changes in sales volume 8. Growth stage: The product life cycle stage in which sales rise rapidly 9. Inelastic demand: A form of demand in which changes in price do not affect demand 10. Introductory stage: The product life cycle stage when the product first appears in the marketplace 11. Law of supply and demand: Economic principle which states that the supply of a good or service will increase when demand is great and decrease when demand is low 12. Market price: Actual price that prevails in a market at any particular moment 13. Market share: An organization’s portion of the total industry sales in a specific market 14. Mark-up: The difference between the cost of a product and its selling price 15. Maturity stage: The product life cycle stage in which sales peak and then increase at a slower rate or start to decline 16. Monopolistic competition: A type of market structure in which a lot of businesses sell similar products that have only a few differences 17. Obsolescence: The state of being outmoded or unfashionable 18. Oligopoly: A market structure in which there are relatively few sellers, and industry leaders usually determine prices 19. Operating expenses: All of the expenses involved in running a business 20. Price discrimination: An illegal activity in which a business charges different customers different prices for similar amounts and types of products

Steps in Setting Price The primary factor business owners consider when determining the ceiling prices of their products are the Consumer perceptions and demand.

Steps in Setting Price Study the competition: How will you respond to competitor’s prices? Decide on a pricing strategy: Select the strategy with the greatest potential for profit. Set your price: Monitor sales, customer reactions, and company goals to plan for needed changes.

Specific Pricing Techniques Promotional pricing: Selling a product at a temporarily lower price to attract customers. Loss leaders: Selling a product below cost in an effort to increase customer traffic. Special event pricing: Sales events designed to attract customers and encourage them to buy. Example: Back- to-School Sale Fixed pricing (One-Price Policy): Charging the same prices to all customers regardless of the quantity of the purchase.

Specific Pricing Techniques Variable pricing (Flexible-Price Policy): Encourages customers to bargain with sellers in an effort to obtain the best price. Price lining: Establishing price points between products in a product line; used to communicate differences in quality and/or service to consumers. Unit pricing: Stating the price of a product per unit of standard measure. Required by some states to do this

Specific Pricing Techniques Psychological pricing: Used by organizations that believe that customers base their perceptions of products on price and that these perceptions affect customer buying decisions. Odd/even cent pricing: Prices ending in odd numbers communicate a bargain. Prices ending in even numbers communicate quality. Prestige pricing: Customers equate high price with high quality. This technique sets a higher-than average price for products to communicate quality and status.

Specific Pricing Techniques Pricing for new products: Price planning is a vital step in ensuring product success for new products. Skimming pricing: Setting a high price to capitalize on demand when introducing a product that has little competition and will appeal to customers who like to be the first to have the latest products. Penetration pricing: Setting a low price to motivate customers to purchase when introducing a product into a competitive market and attempting to gain customer trial.

Calculating Prices

Break-Even Point The point at which the gain from an economic activity equals the costs and expenses incurred in pursuing it -It is reached when sales equal the costs and expenses of making or distributing a product Some companies just want to be able to “break-even” when starting a new business -

BEP formula = Total Fixed Expenses Selling Price – Variable Expenses -Example: With fixed costs of $9,000and variable cost of $7 per unit will sell at a price of $15 per unit. Compute the break-even point: $9,000 (total fixed costs) $15 (selling price) - $7 (variable costs) = 1,125 units To convert to dollars-1,125 units X $15 (SP) = $16,875

Markup Businesses (retail or wholesale) markup their products/services to make a profit Retailers and wholesalers use the same formula to determine the selling price Formula: C + OE + P = SP (Cost + Operating Expenses + Profit (mark-up) = Selling Price) Example: If the cost of a sweater is $20 and the operating expenses are $5 and they want to make a $15 profit then the selling price is $40 ($20 + $5 + $15 = $40)

Markdowns Markdown A reduction from the original selling price. Example= 25 % off of $50= 37.50 $50*25% = $12.50, $50 - $12.50 = $37.50 Reasons for markdowns: Buying errors: wrong styles, color, sizes, materials or quantities Pricing errors: initial price may be set too high Special sales: stock marked down for special sales events

Discounts Discounts are price adjustments often taken by employees for purchases or offered by vendors (suppliers) to their customers to encourage prompt payment or to get rid of seasonal items Formula: Selling Price x Discount = New Discounted Price

A business determines the final cost of a product purchased for resale by subtracting allowed discounts and transportation charges from the list price component