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Principles of Business, Marketing, and
Finance
Prices in a Private Enterprise System
Copyright © Texas Education Agency, 2011. All rights reserved
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royalty fee.
Copyright © Texas Education Agency, 2011. All rights reserved
Value and Price
• Pricing Factors
– Supply and demand
– Uniqueness
– Age
– Season
– Complexity
– convenience
Copyright © Texas Education Agency, 2011. All rights reserved
Price
• Money a customer must pay
for a product or service
– Includes product costs,
operating expenses, and a
profit
– Markup-amount added to the
cost of a product to set the
selling price equal to the
expected gross margin
– Markdown-a reduction from
the original selling price
Copyright © Texas Education Agency, 2011. All rights reserved
Price as a Marketing Tool
• Satisfaction is related to price.
• Price determines how much money a business
will make to cover costs and make a profit.
Copyright © Texas Education Agency, 2011. All rights reserved
Importance of Price
• Value in the view of the
customer
• Part of the marketing mix
• Communicates the value
of products and services
• More than the amount
the customer must pay
for a product or service
Copyright © Texas Education Agency, 2011. All rights reserved
Price Adjustability
• Prices can be changed
quickly
• Changing a price sticker
or marking out an old
price
Copyright © Texas Education Agency, 2011. All rights reserved
Price: An Economic Concept
• People have unlimited wants and needs
• People have limited resources
• Price allocates available resources among people
• Economic utility-value added through changes in
form, time, place or possession
Copyright © Texas Education Agency, 2011. All rights reserved
Elasticity of Demand
• Based on the number of
good substitutes for a
product
• Based on the willingness
of consumers to go
without a product if the
price rises too much
Copyright © Texas Education Agency, 2011. All rights reserved
Types of Demand
• Inelastic-a price
decrease will
decrease total
revenue
• Elastic-a price
decrease will
increase total
revenue
Copyright © Texas Education Agency, 2011. All rights reserved
Setting Price Objectives
• Maximize Profits
• Increase Sales
• Maintain an Image
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Determining a Price Range
• Maximum price
• Minimum price
• Breakeven point
-amount that must be sold just to
cover all costs
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Information to Calculate Breakeven
Point
•
•
•
•
•
Fixed costs
Variable costs
Total costs
Product price
Total revenue
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Calculating a Selling Price
•
•
•
•
•
•
Product cost
Gross margin
Operating expenses
Net profit
Markup
Markdown
Copyright © Texas Education Agency, 2011. All rights reserved
Pricing Based on Market Conditions
• Competitive Environment
• Product Life Cycle
– Changing competition during business cycles
– Skimming price-high price designed to emphasize the
quality or uniqueness of the product
– Penetration price-a very low price designed to increase the
quantity sold of a product by emphasizing the value
Copyright © Texas Education Agency, 2011. All rights reserved
Consumer Purchase Classifications
• Staple convenience
goods and pricebased shopping goods
• Customers see few
product differences
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Non-Price Competition
• De-emphasize price
• Carefully study the needs of
a target market
• Find out things customer find
dissatisfying about the
competition
• Develop a better, more
satisfying marketing mix
Copyright © Texas Education Agency, 2011. All rights reserved
Pricing Strategies
• Price Flexibility
– One-price policy
– Flexible pricing policy
• Price Lines
• Geographic Pricing
– FOB Pricing
– Zone pricing
Copyright © Texas Education Agency, 2011. All rights reserved
Discounts and Allowances
• Reductions in prices
– Quantity discount
– Seasonal discount
– Cash discount
– Trade discount
– Advertising allowance
– Coupon
– Rebate
Copyright © Texas Education Agency, 2011. All rights reserved
Added Value
Changing the customer’s perception of
value by making additions to the
purchase.
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