Pricing

Essential Questions/I Can Statements I CAN explain factors that influence price and identify the four areas of pricing I CAN demonstrate my ability to solve cost plus pricing formulas I CAN apply my knowledge of pricing and competitive advantages to a mock business scenario

What determines Price? Supply and Demand (covered last class) Costs Perceived Value

Areas of Pricing Cost of goods Overhead expenses Distribution costs Profit margin

Cost of Goods Costs incurred by a business to produce or purchase goods and services to be sold ▫Examples: Raw materials & Parts, production machinery, labor, etc.

Overhead Expenses Costs incurred to run a business ▫Examples: Maintenance, Accounting, Advertising, Rent &Utilities, Insurance, Management Salaries, etc.

Distribution Costs Costs incurred to distribute goods and services ▫Examples: Packaging, Storage, Shipping, Channels of Distribution

Profit margin The amount of money charged above costs & expenses ▫Factors that effect profit margin: Markups, discounts, competition, supply & demand

Pricing Based on Cost (Markup) Basic Pricing Formula: COST + MARKUP = RETAIL PRICE Complete Cost Method Pricing Worksheet (group activity)

Pricing Based on Value Products that are valued highly can be set at a high price (think back to supply and demand) ▫Pharmaceuticals (Health) ▫Rolex (Image) Reference pricing ▫Vaseline lip balm ▫Water bottles

Michael Porter’s Competitive Advantage Cost Leadership-focuses on providing goods at the lowest possible price to consumers ▫Cost plus pricing ▫Ex: Wal-mart Differentiation-focuses on providing the best or most unique goods to consumers ▫Value Pricing ▫Ex: Rolex Focus-focuses on providing goods to the small segment of consumers whose wants are not being met by general industry ▫Cost plus or value pricing ▫Ex: Gatti’s Pizza (hint: can be combined with either strategy above)

Hot Dog Activity!