Chapter Nine: Pricing Strategies Visions and Ventures

Pricing Strategies Big Ideas for Entrepreneurship The price you charge can affect whether your venture succeeds or fails. If you prices are too low, sales may be good but you may not have enough profit to pay your costs. If sale prices are too high, sales may be slow and you may not have enough profit to pay your costs.

Deciding How Much to Charge Deciding how much to charge for a product or service is an important part of business. You want to get the best possible price. You also want to make a price attractive to customers.

Ways to Set Prices There are several different approaches to setting a price.

Cost-Plus Pricing In this pricing model, you add a markup to the cost of each item to determine its price. The markup is often a percent of the cost per unit. Markup: the difference between what a business pays for an item and the price it charges customers. Percent: a way of expressing an amount out of 100 equal parts; for example, 1% means 1/100 of the amount; 50% means 50/100, or ½; 100% means 100/100 or the full amount. Did you do this for your venture?

Cost-Plus Pricing Example: A business marks up prices by 100%. Suppose the business’s cost for a camera is $90 and the price is marked up by 100%. Then the selling price would be $90 plus 100% of $90. That would be $90 plus $90, which is $180.

Psychological Pricing Prices are set to give the impression that they are a good deal for the customer. Example: Pricing a product at $9.99 instead of $10.00 gives the impression that it costs about $9.00, not about $10.00.

Follow-the-Competition Pricing If you choose this type of pricing, you need to know all your costs. This will help you determine whether you can make a profit at this price. Example: A new bakery charges the same prices for its products as the grocery store does.

Penetration Pricing Prices are set below competitors’ prices. This can attract new customers, but your price needs to be high enough to give you a profit. Example: A new baby store sells strollers for 10% less than competing stores as a penetration-pricing strategy.

Price Skimming This type of pricing is possible when a business has no competition. You can set any price that customers are willing to pay. Example: Someone might decide to price a new toy that no one else is selling at $49.99. Later, competitors start selling similar toys, and your sales slow down. Then you might lower your price to $39.99.

Loss-Leader Pricing The prices of some items are very low to attract customers who might buy other items. Example: Some movie theatres charge a low admission price. They know that they will make their big profits selling popcorn, candy, and drinks.

Choosing a Pricing Strategy These are some of the questions to ask when choosing a pricing strategy: Who else sells this product or service? How much do they charge for it? How much are your customers willing to spend? How many people want your product or service? How much do people want your product or service? How much will it cost to make your product or provide your service? How much will it cost to get your product or service to your customers? What would be a good way to convince people to buy your product or service?

Vocabulary: Cost-plus pricing: increasing the cost of an item by a given percent to determine the price. Markup: the difference between what a business pays for an item and the price it charges customers. Percent: a way of expressing an amount out of 100 equal parts; for example, 1% means 1/100 of the amount; 50% means 50/100, or ½; 100% means 100/100 or the full amount. Psychological pricing: using an understanding of how customers think to set prices.

Vocabulary: Follow-the-competition pricing: setting prices to match competitors’ prices. Penetration pricing: setting prices below competitors’ prices to help you penetrate (break into) the market. Price skimming: charging high prices when there is no competition. Loss-leader pricing: setting the price of an item at or less than the cost per unit to attract customers who might buy other items.

Assignment: Create a Word document titled “Pricing Strategies for Final Venture” Identify each product you are going to be selling and the pricing strategy you will use for each. Explain why you think this pricing strategy will help increase your profit margin for each. Hand in over the network.

End of Chapter Nine: Pricing Strategies