Download unit e product/service management and pricing

UNIT E
PRODUCT/SERVICE
MANAGEMENT AND
PRICING
9.02 Exemplify pricing objectives,
policies, and strategies.
Sales - Income

Income: Money coming into the
business from the sale of goods or
services.
Cost of goods sold
The total amount spent to produce or to
purchase the goods that are sold.
**The largest single factor in establishing
retail price of products.
Operating expenses
Debts incurred in the routine operation of
a business.
 Variable
expenses: Expenses that change
from one month to the next depending on
the needs of the business
 Fixed expenses: Expenses that remain the
same over a specific period of time.
Profit

Profit (return): The money earned from
conducting business after all costs and
expenses have been paid.
Profit (cont)

Gross profit (margin): The difference
between the selling price (sales revenue)
and the cost of goods sold.
Profit (cont.)

Net profit (net income): The amount left
after the total expenses are subtracted
from gross profit. Generally this
amounts to 1-5%.
Profit (cont.)

Return on investment (ROI): A
calculation that is used to determine the
relative profitability of a product.
Calculated by dividing net profit by
total investment
Income Statement
SALES
 Minus Cost of Goods Sold
 = GROSS PROFIT
 Minus Operating Expenses - Fixed & Variable
 = NET PROFIT

Markdown
A reduction in selling price used to reduce
inventory as a result of:
buying errors,
promotional pricing, or
sales techniques.

Markdown

Retail Price x Markdown % = Markdown $
 Example:

$150 x 30% = $45
Retail Price – Markdown $ = Sale Price
 Example:
$150 - $45 = $105
Activity

Fill in Financial Worksheet
Wednesday, May 5th
Warm up – Financial Worksheet – fill in
blanks
 Obj. 9.01 – Review
 Obj. E9.02 – Pricing Techniques

 Slide
Show/Notes
 Activities
Pricing approaches
 Demand-oriented
pricing: Pricing
based on what consumers are
currently willing to pay for a
product.
Pricing approaches
 Competition-oriented
pricing:
Prices set on the basis of what
competitors charge.
Pricing approaches (cont.)
 Cost-oriented
pricing: Pricing
based on the cost of the product
plus a markup or desired profit.
 Two Types:
Markup
Cost
plus pricing
Pricing approaches (cont.)
Markup
pricing—A
predetermined markup
percent is added to the cost of
all goods sold to reach a selling
price.
 This is the simplest pricing
method.
Pricing approaches (cont.)
Cost
plus pricing—All costs and
expenses for a particular product
are added to the desired profit to
determine the selling price.
(This is similar to markup, but
expenses are calculated separately
for each individual item.)
Pricing techniques
 Product
mix pricing strategies
 Segmentation pricing strategies
 Psychological pricing strategies
 Promotional pricing strategies
 Discounts and allowances
Pricing techniques
 Product
 Price
mix pricing strategies
lining
 Optional product pricing
 Captive product pricing
 By-product pricing
 Bundle pricing
 Geographical pricing
 International pricing
Pricing techniques
 Product
mix pricing strategies
Price
lining: A special pricing technique
that sets a limited number of prices for
specific groups or lines of merchandise.
 Price
lines must have enough differentiation
so that the business has a low, middle, and
high range of pricing.
 Example: A store might sell its
merchandise for $15, $40, and $85.
Pricing techniques (cont.)

Product mix pricing
strategies
 Optional
product pricing:
Pricing for accessories or
options sold with the main
product. Example:
Automatic transmission,
air conditioning, and/or a
moon roof are options
that may be added to a
car at an additional price.
Pricing techniques (cont.)

Product mix pricing strategies
 Captive
product pricing: Sets the price for
a primary product low, but compensates for
that low price by pricing the supplies
needed to operate that product high.
Example: Ink-jet printers are fairly
inexpensive, but the ink cartridges needed
for the printer are expensive.
Pricing techniques (cont.)

Product mix pricing strategies
 By-product
pricing: Sets prices on products
produced during production of other
products.
Prices are generally low.
 Example: Wood chips created as a byproduct of work done by a tree service would
be inexpensive.

Pricing techniques (cont.)

Product mix pricing strategies
 Bundle
pricing: Packaging and selling
complementary products along with the
primary product at a single price.
Allows a company to include more items for sale
to its customers, and in turn, increase its sales and
profits.
 Example: Bundling a PC with software and a
printer

Pricing techniques (cont.)

Product mix pricing strategies
 Geographical
pricing: Pricing to include
charges necessary to get the product
delivered to the customer’s location.
Pricing techniques (cont.)

Product mix pricing strategies
 International
pricing: Setting price based
on costs, consumers, economic conditions,
and monetary exchange rates. Costs that
need to be considered include shipping
charges and tariffs.
Pricing techniques (cont.)

Segmentation pricing strategies
 Buyer
identifications pricing
 Product design pricing
 Purchaser location pricing
 Time-of-purchase pricing
Pricing techniques (cont.)

Segmentation pricing strategies
 Buyer
identification pricing: Pricing that
offers consideration to buyer segments
based on special characteristics of the
segment. Example: Offering discounts to
senior citizens, many of whom are on fixed
incomes
Pricing techniques (cont.)

Segmentation pricing strategies
 Product
design pricing: Pricing different
styles of products due to demand.
 Example
= pastel Uggs are cheaper than
core colors.
Pricing techniques (cont.)

Segmentation pricing strategies
 Purchaser
location pricing: Pricing
according to where a product is sold and/or
the location of the product. Example:
Broadway tickets for a show in New York
City cost more than tickets for the same
show performed in Charlotte, NC.
Pricing techniques (cont.)

Segmentation pricing strategies
 Time-of-purchase
pricing: Pricing based
on peak/non-peak business seasons.
Example: The price of an oceanfront
hotel room in July versus the price of the
same room in January.
Pricing techniques (cont.)

Psychological pricing strategies
 Odd-even
pricing
 Prestige pricing
 Multiple-unit pricing
 Everyday low prices
Pricing techniques (cont.)

Psychological pricing strategies
 Odd-even
pricing: A pricing technique that
involves setting prices that all end in either odd
or even numbers.
Odd numbers such as $9.99 or $.79 convey a
bargain.
 Even numbers such as $20 and $100 convey an
image of quality.

Pricing techniques (cont.)

Psychological pricing strategies
Prestige
pricing: A pricing strategy
that sets higher-than-average prices
to suggest status and high quality to
the consumer. Example: Rolls
Royce and Waterford Crystal are
priced high due to their prestigious
image.
Pricing techniques (cont.)

Psychological pricing strategies
 Multiple-unit
pricing: Pricing items in
multiples. Example: Candy bars 3 for $1.00
seems to be a better deal than 3 individual
items for $.34 each.
Pricing techniques (cont.)

Psychological pricing strategies
 Everyday
low prices: Setting low prices on
a consistent basis with no intention of
raising them or offering discounts in the
future.
Pricing techniques (cont.)

Promotional pricing
 Loss
leader pricing
 Special Event pricing
 Rebates
 Coupons
Pricing techniques (cont.)

Promotional pricing
 Loss
leader pricing: Offering very popular
items of merchandise for sale at below-cost
prices to increase store traffic.
The hope is that the increase in customer traffic
in the store to buy the bargain item will also
result in increased sales of regular price items.
 Example: Two 12-can packs of soda for $5.00

Pricing techniques (cont.)

Promotional pricing
 Special
event pricing: Offering reduced
prices for a short period of time for specific
events of promotions. Example: Back-toschool or President’s Day sales
Pricing techniques (cont.)

Promotional pricing
 Rebates:
Partial refunds provided by the
manufacturer to consumers who mail in
proof of purchase according to
manufacturer guidelines.
Pricing techniques (cont.)
 Promotional
Coupon:
pricing
A printed voucher that
provides a reduction in the selling
price at the time of purchase.
Pricing techniques (cont.)

Discounts and allowances
 Cash
discount
 Quantity discount
 Trade discount
 Seasonal discount
Pricing techniques (cont.)
 Discounts
Cash
and allowances
discount: A reduction in price
offered to buyers to encourage prompt
payment. Example: An invoice has
terms 2/10, net 30. If the invoice is paid
within 10 days, a 2% discount is
allowed. If payment is not made within
the discount period, the full amount is
due within 30 days.
Pricing techniques (cont.)

Discounts and allowances
Quantity discount: A reduction in price
offered to the buyer for placing large
orders. Example: A customer who buys
1-5 cases of paper pays $12.00 per case.
If the same customer buys 6-10 cases of
the same paper, the price per case
decreases to $11.50.
Pricing techniques (cont.)
 Discounts
and allowances
Trade
discount: A discount allowed by
manufacturers to wholesalers and
retailers.
 Often
expressed as a discount on a
manufacturer’s suggested retail price
 Example: Suggested retail price for a
paperback novel is $12.99. The retailer
price is $12.99 less 40%, or $7.79.
Pricing techniques (cont.)

Discounts and allowances
Seasonal discount: A reduction in price
offered to buyers willing to buy at a time
outside the normal buying season.
Manufacturers offer these discounts to
keep production amounts stable.
Activities

Worksheets (2)