Pricing Chapters 25-27

What are the goals of a company when they determine a price?

Price Value in money (or its equivalent) placed on a good or service.

Goals of Pricing 1. Earn a Profit- Earn as much money as possible Return on Investment=Profit/Investment 2. Gain Market Share- Firm’s percentage of total sales volume generated by all competitor’s in a given market share

Goals of Pricing 3. Meet the Competition- Keep the price of your product close to competitors

Return on Investment Profit/Investment (Cost) = Percentage Profit = Sales – Cost We sell hoodies for $22 dollars and they cost us $18 to make, what is the ROI? Profit = $22- $18 = $4 ROI = $4/$18 = 22%

Market Share Percentage of total sales volume generated by all companies of a given market Ex- Shoe Market Nike $25 Million Reebok $13Million New Balance $10 Million Addidas $8 Million

Shoe Market Nike 25/56= 45% Reebok 13/56= 23% New Balance 10/56= 18% Addidas 8/56= 14%

Return on Investment We sell t-shirts at $12 a piece. Each shirt cost $6 to make and we have a total cost of $100 for marketing and $200 for employees. If we bought and sold all 150 shirts what is our ROI? Profit=Sales-Cost Sales = 12 X 150 = 1800 Cost = 6 X 150 = 900 + 300 = 1200 Profit 1800-1200= 600/1200 = 50%

What are factors that will affect the price of an item?

Market Factors Affecting Prices 1. Costs and Expenses- Price relates directly to cost of a business Breakeven point- Point where sales equal expense, when a profit begins

Market Factors Affecting Prices 2. Supply and Demand Elastic Demand- Change in price greatly affects Demand Ex- Steak Inelastic Demand- Change in price does not affect demand. Ex-Milk, Bread

5 Factors of Elasticity Brand Loyalty Price relative to income Availability of substitutes Luxury vs. Necessity Urgency of purchase

Major Factors Affecting Price 3. Consumer Perceptions- Pay more for what they believe to be a higher qualify product. 4. Competition-

Breakeven Point Point which sales revenue equal total cost and a profit begins with the next sale BE Units=Total Costs/Selling Price BE$=Breakeven in Units X Selling Price

Breakeven Point We bought 200 pairs of sunglasses that cost us $5 each and we sell the sunglasses for $10 each. What is the breakeven point for the sunglasses? Total cost = 200 X $5 = $1000 BE = $1000/$10 = 100 pair of sunglasses

Breakeven Point The store purchases 200 USB chargers at a cost of $3, what would be the breakeven points if we charged $5, $6, or $7 for each charger?

Are their laws in place about pricing and what are some illegal acts involved around pricing?

Legal and Ethical Issues Price Fixing- Competitors agree on a price range they are going to charge Price Discrimination- Firm’s charge different prices to similar customers in similar situations Unfair Trade Practices Law- Prevents company’s from charging below cost (Predatory Pricing) to eliminate competition Ex-Loss Leader- Charge below cost

Legal and Ethical Issues Unit Pricing- Laws passed so customers can compare price based on unit of measure such as ounce or pound

Legal and Ethical Issues Price Advertising Cannot offer a price reduction unless the original price was offered to the public No Bait-and-Switch – Advertise one product with no intent of selling it

Pricing Concepts 1. Cost Oriented- Calculate costs and determine how much profit is desired Cost + Markup = Retail Price

Pricing Concepts 2. Demand Oriented- Higher demand higher the price 3. Competition Oriented- Price above, below, or at competition\ Skimming- High price, Demand > Supply Penetration- Low price, Supply > Demand

Pricing Concepts 1. An item costs $5 to make and it is markup up by $8, what is the price? $5 + $8 = $13 2. An item is sold at $25 and it marked up by $10, what is the cost? C + $10 = $25 Cost = $15

Pricing Concepts 3. An item is priced at $80 and it cost the business $50, what is the markup? $50 + MU = $80 Markup = $30

1. A shirt costs a business $8 to make and they markup the price $5, what is the price? 2. Sweatpants sell for $22 and the business pays $15 to make them, what is their markup? 3. Coffee Mugs are marked up $2 and they sell for $5, what is their cost to make?

Pricing Strategies Price Lining- Sets a limited number of prices for a group or line of merchandise Ex- $25, $50, $75 2. Bundle Pricing- Several complementary products sold in one package

Psychological Pricing Creates illusions for customers Odd-Even pricing- Odd numbers bargain- $.99 Even numbers quality- $10.00 2. Prestige Pricing- Higher than average prices to suggest status

Psychological Pricing 3. Multiple-Unit Pricing- 3 for $1.00 4. Everyday Low Prices- Low prices set at all times with no intent of offering discounts

Price Lining A stapler costs $5 to make and it is marked up $10, A business has a price line strategy of $12, $22, and $32, what is its price? Cost + Markup = Retail Price $5 + $10 = $15 (Calculated) Price Line $22

Steps to Determine Price Establish Objectives Determine Costs Estimate Demand Study Competition Decide on a Strategy Set Prices

Price Lining Cost Markup Retail Price Price Line $35 $20 $25 $10 $70

What is the difference between a markup and a markdown?

Math Steps Cost + Markup = Retail Price - Markdown = Sales Price

What type of number can a markup be expressed as?

Markup in Dollars Difference between retail price and cost. Retail Price – Cost = Markup Cost + Markup = Retail Price Retail Price – Markup = Cost

Markup % Markup % (Retail) = Markup/Retail Price Markup % (Cost) = Markup/Cost

Markup % (Retail) An item costs a business $20, it is marked up $10, what is its markup percentage on retail Cost + Markup = Retail Price $20 + $10 = $30 MU$/Retail Price = Markup% (Retail) $10/$30 = 33%

Markup % (Cost) An item sells at $40, it is marked up $25, what is its markup percentage on cost. Cost + Markup = Retail Price Cost + $25 = $40 Cost = $15 MU$/Cost = Markup% (Cost) $25/$15 = 167%

Markup Percentages An item cost a business $55 to make and it sells for $75, what is Markup Dollars = Markup Percentage (Retail) = Markup Percentage (Cost) =

Is markup in dollars or percentages most commonly used to create prices and why?

Cost Method of Pricing Markup based upon cost Retail Price = (Cost X Markup%) + Cost An item costs a business $75 and marked up 80% on cost, what is the markup in dollars and the retail price. Markup on Dollars= $75 X .8 = $60 Retail Price = $60 + $75

Retail Method of Pricing Markup is based upon retail Cost/(100%-Markup%) An item costs the business $50 and all items are marked up 25% based upon retail, what is the retail price and markup in dollars? Retail Price = $50/75% = $66.67 Markup in Dollars = $66.67 - $50 = $16.67

Pricing Methods An item costs $65 and is marked up 30% on retail, what is the retail price and markup in dollars? An item cost $65 and is marked up 30% on cost, what is the retail price and markup in dollars?

What is a markdown and how are they calculated?

Markdowns Markdown Percentage Markdown$ = Retail Price – Sales Price Reduction of the original price Markdown $=Retail Price X Markdown% Sales Price = Retail Price – Reduction

Markdowns An item has a retail price of $75 and a sales price of $50, what is the markdown and markdown percentage? Markdown$ = $75 - $50 = $25 Markdown% = $25/$75 = 33% 2. An item is priced at $100 and it is marked down 30%, what is sales price? Markdown $ = $100 X .3 = $30 Sales Price = $100 - $30 = $70

Markdowns An item has a retail price of $10 and it is has a sales price of $6, what is the markdown in dollars and percentage? An item has a retail price of $35 and it is marked down 25%, what is the markdown in dollars and sales price?

Once an item is marked down does it always sell, and if not, what options does the business have?

Maintained Markup Actually amount realized on the sale MMU$ = Sales Price – Cost MMU%=MMU$/Sales Price

Maintained Markup An item has a retail price of $250 and it is marked down 20%, and sells at that price, what is its maintained markup in dollars and percentage if it costs a business $125? Markdown $ = $250 X 20% = $50 Sales Price = $250 - $50 = $200 MMU$ = $200 - $125 = $75 MMU% = $75/$200 = 37.5%

Maintained Markup Percentage An item cost a business $100 to make and it is marked up $50. The business has to markdown the item 25% three different times before it is sold. What is the maintained markup in dollars and percentage?

Discounts Quantity Discounts- Offered for large purchases Trade Discounts- Manufacturers suggest prices to members of the channel of distribution and discount from that price 3. Seasonal Discounts- Offered during out of season times

Cash Discounts A discount given to a business by manufacturers to insure quick payment. 1.Ordinary Terms- Date based on invoice 2/10 net 30 Invoice Date Dec. 10 2% discount if paid within 10 days Full payment due in 30 days

Advanced Terms Advanced Terms Date later than the invoice date 2/10 net 30, as of Jan. 1

Extra Terms Extra Terms Extra Terms- Added dates to pay for the items 2/10 net 30, 30 Extra 40 days for discount 60 days to pay full amount

End of the Month End of the Month Payment begins at the end of the month shown on invoice date. 2/10 net 30, EOM Invoice date Dec. 17 Start counting from Dec. 31

Receipt of Goods Receipt of Goods Payment begins when goods are received 2/10 net 30, ROG Invoice Date Dec. 15, Received goods Jan. 10

Cash Discount Table Date begin counting from Ordinary Invoice Advanced Date Given Extra End of the Month End of Invoice Month Receipt of Goods Day of Receiving Merchandise