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Objective 3.03 Employ Pricing Strategies to Determine Prices
Part I
a.
b.
c.
d.
Identify types of pricing objectives.
Explain reasons for setting pricing objectives.
Describe ways in which pricing objectives are used.
Demonstrate procedures for establishing pricing objectives.
Survival
Prices are ________. A company can ______ them in order to increase sales enough to keep the business going.
The company uses a survival-based price objective when it's willing to accept _____________ losses for the sake of
long-term viability.
Profit
Price has both direct and indirect effects on profit. The direct effect relates to whether the price ________ the ____
of producing the product. Price affects profit indirectly by influencing ____ ______ units sell. The number of
products sold also influences profit through economies of scale -- the relative benefit of selling more units. The
primary profit-based objective of pricing is to maximize price for __________ profitability.
Sales
Sales-oriented pricing objectives seek to ______ volume or market share. A ________ ________ is measured
against a company's own sales across specific time periods. A company's _______ _______ measures its sales
against the sales of other companies in the industry. Volume and market share are _______________ of each
other, as a change in one doesn't necessarily spur a change in the other.
Status Quo
A status quo price objective is a tactical goal that encourages competition on factors ______ than ______. It
focuses on ___________ market share, for example, but not increasing it, or matching a competitor's price rather
than beating it. Status quo pricing can have a stabilizing effect on demand for a company's products.
What is a pricing objective?
A goal that _______ a business in setting the cost of a product or service to potential consumers. A pricing
objective underlies the pricing process for a product, and it should reflect a company's _________, ________,
_________ and _________ goals, as well as consumer price expectations and the levels of available stock and
production resources.
6 Steps to Setting a Price Strategy for your Business
1.
Select the pricing objective to decide where you want to ____________ your market offering.
2.
Determine the _____________.
3.
Estimate the ______.
4.
_________ competitor costs, prices, offers and possible reactions.
5.
Select a pricing ___________.
6.
Finally, select the ________.
Part II
a.
b.
Identify examples of fixed expenses.
List examples of variable expenses.
c.
d.
e.
f.
Cite examples of mixed/semi-variable expenses.
Explain the importance of break-even in setting prices.
Calculate the break-even point for a product in units.
Calculate the break-even point for a product in dollars.
What Is the
Break-Even
Point?
A business reaches its break-even point when its total sales _______ at a
given selling price _______ its total _____. In other words, the business
breaks even when it makes as much as it has spent to produce and/or sell
its product(s). The business must calculate its total costs and estimate its
sales revenues to project the point at which it will break even.
Components of
Break-Even
The components of break-even include:
 Costs
o _______ costs
 Are fairly predictable business costs that _____ _______ when
sales go up or down
 Tend to stay the _____, no matter how many products the
business produces or sells
 Examples: taxes, rent or mortgage payments, equipment
payments or leases, wages and salaries, depreciation of
physical assets, fees and licenses, interest on loans, insurance,
etc.
o ________ costs
 Are costs that _______ along with changes in sales volume
 Examples: cost of goods, promotional costs, sales tax, raw
materials, business travel, sales commissions, etc.
 Can be predicted only if the business can make a fairly
accurate __________ of what its sales volume will be
o ______-variable costs
 Vary to ____ ______ in response to sales
 Should be _________ as either fixed or variable for the
purpose of calculating break-even (assigning semi-variable
costs to the fixed-cost category results in a higher, more
conservative break-even point)
 Sales revenues
o Most businesses receive the bulk of their _______ from sales
revenues, money received from sales of goods and services.
o There are two ways that sales revenues increase:
 Sales revenues increase as the number of _____ _____
increases.
 Sales revenues increase as the selling ______ per unit
increases.
 Profit and loss
o A business does not make a profit until it has ______ the breakeven point—when total sales revenues are ________ than total
costs.
o A business loses money if it does ___ ____ its break-even point
and sales revenues are less than total costs.
Why Calculate
Break-Even?
Calculating the break-even point can serve a number of purposes for a
business. The most important reason for calculating the break-even point
is to determine at what point the business can expect to ______ making a
______. Calculating break-even can also help the business to make
important decisions, such as:
 _______ prices
o Most marketers consider _____ than ___ possible selling price for a
product before setting a final price.
o Calculating break-even helps a business to _______ the number of
products it would expect to sell at each price.
o Calculating break-even for estimated _____ at each selling price
helps the business to select the most ______________ price.
 Relocating the business
o Calculating break-even can help businesses determine whether
moving to a ___ _________ would benefit them.
 Determining __________ needs
o All businesses need capital, or money, with which to operate.
o A business should ___ _______ too much money because the
interest it must pay on the amount borrowed will increase its
expenses.
o A business also should ___ ___ _____ too much of its capital for
business operations because the money will not be available for
other uses, such as buying goods for resale.
o Calculating break-even helps a business to borrow or to set aside
__________ sums.
 Offering incentives
o Some businesses offer incentives such as ________ or sales
____________ to their employees to motivate them to do a good
job.
o These businesses need to know what they can ______ to spend
before they offer these incentives.
Calculating
Break-Even
A basic formula for calculating break-even for a product is:
__________________
BP—break-even point
margin
FC—total fixed costs
VCM—variable-cost
Putting the formula into words, break-even point equals total fixed costs
_________ by the variable-cost margin.
The variable-cost margin is the amount that each ____ contributes to fixed
_______. It is also called the fixed-cost contribution. Variable-cost margin
is calculated by _____________ variable costs per unit from the selling
price per unit.
Break-Even in
Calculating break-even in units determines ___ ______ products a business
Units
must sell to break even. Let’s see how this might work for a hot dog
vendor at the baseball park:
 The vendor’s fixed costs include a $25 license and $100 for equipment
rental.
 Variable costs are estimated to be $50 for twelve dozen (144) hot dogs
and buns, as well as condiments.



Break-Even in
Dollars
Break-even can also be expressed in dollars:



Steps for
Calculating
Break-Even
The hot dogs will sell for $1.50 each.
How many hot dogs will the vendor need to sell to break even?
o Determine total fixed costs by adding the two fixed costs together:
____________ = $125
o Determine variable costs per unit by dividing the variable costs by
the number of units:
____________ = $0.35
o Calculate variable-cost margin by subtracting the variable cost per
unit from the selling price:
_____________ = $1.15
o Therefore, using the break-even formula, BP = FC ÷ VCM, we find:
BP = $125 ÷ $1.15 = ______
The vendor must sell ____ hot dogs to break even and begin making a
profit.
After you calculate the number of units you need to sell to break even
(109 for the hot dog vendor), _________that number by the selling
______ per unit ($1.50 for each hot dog).
This figure is the total _____ sales you need to make to break even.
In the case of the hot dog vendor, s/he needs to make $_______ in
sales to break even:
109 × $1.50 = $163.50
The steps to calculating break-even include:
 Identify _____ and _______.
 ____________ costs as fixed or variable.
 ________ the costs in each classification.
 Calculate the __________ cost per unit.
 _________ the variable cost per unit from the selling price per unit to
obtain the variable-cost margin.
 _______ the total fixed costs by the variable-cost margin to determine
break-even point.
Part III
a.
b.
c.
d.
e.
f.
Identify strategies for pricing new products.
Select product-mix pricing strategies.
Determine discounts and allowances that can be used to adjust base prices.
Adjust base prices using psychological pricing techniques.
Select promotional pricing strategies.
Select geographic pricing strategies to adjust base prices.
g.
h.
Identify segmented pricing strategies.
Demonstrate procedures for selecting appropriate pricing strategies for products.
New product Pricing Strategies
____________ pricing in the introductory stage of a new product's life cycle involves accepting a lower profit
margin and pricing relatively low.
Price ___________ involves setting the price relatively high to generate a high profit margin.
A ____________ product generally supports a skimming strategy.
Product Mix Pricing Strategies
The product mix is the __________ of products and services that a company chooses to offer its market. Pricing
strategies range from being the cost leader to being a high-value, luxury option for consumers.
Cost Plus
Cost-plus pricing is the most basic type of _______ and simply represents setting the cost of a product at some
level ______ the ____ of producing and distributing that product. So, for instance, a jeweler might decide to price
products at a 100 percent mark-up based on the costs that go into creating the product.
Competition Based
Competition-based pricing is pricing that is established specifically to address and ____________ to the prices of
__________' products. Businesses may decide to price either higher or lower or at about the same levels of the
competition, but their decisions are based on an evaluation of what competitors are doing and how they want to
position their product mix.
Discounts and Allowances are reductions to the selling price of goods or services.
■
■
■
___________ Markdowns to get rid of slow-moving, obsolete merchandise
_____________ Markdowns
 To increase _______ and promote merchandise
 To Increase _________ flow and sale of complementary products generate excitement through a
sale
To ___________ _______ to buy additional merchandise
There are five basic types of psychological pricing strategies.
__________ pricing is a strategy of setting prices in odd numbers just below an even price, for example pricing an
item at the odd $19.95 rather than the even price of $20.00. The intention of odd-even pricing is to make the price
appear ____________ ______ than it is.
__________ pricing works on the opposite premise; rather than making prices seem low, prices are inflated in order
to create a sense of greater value. For example, a wine might be priced at $20 per bottle rather than $12 merely to
give the ___________ that it is a _________ product.
__________ pricing is a psychological pricing strategy in which items are _________ together, such as two for $5
rather than $2.50 per item. This strategy creates a sense of ______ and can help boost sales volume by
encouraging the purchase of multiple items.
___________ pricing is the psychological pricing strategy in which a price is temporarily __________ in order to
attract customers.
Price _________ is an effective form of psychological pricing for companies with an __________ product line; it
involves creating a price range for a particular line, for example a budget clothing line with items all priced below
$10.
Geographical Pricing.
Geographical pricing sees ____________ in price in different parts of the ______. For example rarity value, or
where ____________ costs increase price. In some countries there is more tax on certain types of product which
makes them more or less expensive, or legislation which limits how many products might be imported again raising
price.
Segmentation Pricing
If you plan a product segmentation strategy, you may incur higher product development or manufacturing costs to
create _________ _______, so it is important to focus on segments where you can make a profit. Price
segmentation enables you to offer the same basic product, but ____ features that customers are willing to pay for
or ________ cost elements that are not important to customers.
Part IV
a.
b.
c.
d.
e.
Define the following terms: floors, ceilings, and elasticity.
Describe the importance of determining pricing floors and ceilings.
Explain process for setting prices.
Estimate demand for product.
Implement process for setting prices.
Price ceiling is the ________ price that is allowed to be charged for a certain good or survive in an economy, while
the price floor is the ________ possible price
Your event must have a high-enough price to ______ the costs of your event, as well as to provide you
a ___________ stream, if you're expecting to make a profit from the event attendance itself
The price of your event ____________, in part, the venue that you select. You shouldn't charge thousands of
dollars for an event and host it in a 'budget' venue. Conversely, you need to _______ ______ that your event price
covers the cost of your venue and other event costs.
Demand forecasting is the activity of ___________ the quantity of a product or service that consumers will
purchase. Demand forecasting involves techniques including both __________ methods, such as educated guesses,
and ___________ methods, such as the use of historical sales data or current data from test markets. Demand
forecasting may be used in making ______ decisions, in assessing future ___________ requirements, or in making
decisions on whether to enter a new ________. Is the demand elastic or inelastic. Elastic means that if price
changes, _________ changes. Inelastic means demand will ____ _______ if price changes.