Download Price Planning

Standard 4 - Pricing
Standard 4 Day 1
Standard 4 Day 1
What you’ll learn
• Explain the nature and scope
of the pricing function
–Understand the concept of
break-even point
What is Price?
Price is the value of money (or its
equivalent) placed on a good or service.
Forms of Price
• Fee you pay for service
• Amount you pay for food, clothes,
etc.
• Interest on a loan
• Dues for a membership
• Tuition for education
• Wages, salaries paid to workers
Importance of Price
• Establishes image
• Maintains
competitive edge
• Determines profits
Projected Effects of Different
Prices on Sales
Price per
item X
Quantity
Sold =
Sales
Revenue
$50
200
$10,000
$45
250
$11,250
$40
280
$11,200
$35
325
$11,375
$30
400
$12,000
$25
500
$12,500
An increase in the price of an item may not produce
an increase in sales revenue. Why is this true?
Goals of Pricing
• Return on Investment (ROI)
–Calculation used to
determine the relative
profitability of an investment
–The formula to calculate it is
Profit / Investment
–Profit = Sales – Cost
Return on Investment
• Your company sells storage bins for $8
each.
• Your cost to make and market the bins is
Profit
$6.50.
• $8 - $6.50 = $1.50/$6.50 = .23
• Your rate of return on investment is 23
percent.
Goals of Pricing
• Gaining market share – a firm’s
% of total sales volume in a given
market
Goals of Pricing
• Exceed the Break-even Point
– The point at which cost or expenses and
revenue are equal.
• Profit has not been realized but costs have
been covered.
• Fixed Costs / (Price – Cost of Goods Sold)
• Fixed Costs / Profit
• $10,000 / ($12 - $7)
• $10,000 / $5 = 2,000 unit need to be sold to
reach the break-even point.
Standard 4 Day 2
Understand how basic
economic principles affect
pricing
Standard 4 Day 2
What you’ll learn
• Understand how basic economic
principles affect pricing
–Explain the principles of supply
and demand
–Identify factors affecting a
business’s profit
–Explain the concept of
competition
Supply & Demand
Supply – The amount of goods producers
are willing to make and sell.
Demand – The amount of goods consumers
are willing and able to buy.
Supply & Demand Graph
Economic Laws
Law of Demand – As the price of a good or
service increases, the quantity demanded will
decrease.
Law of Supply – As the price of a good or
service increases, the quantity supplied will
increase.
Steps for Determining Prices
• Establish Pricing
Objectives
– Increase sales volume?
– Prestigious image?
– Increase market share?
Steps for Determining Prices
• Study Costs
– Can you make a profit?
– Can you reduce costs without
affecting quality or image?
Steps for Determining Prices
• Estimate Demand
– What do customers expect to pay?
– Prices usually are directly related to
demand.
Steps for Determining Prices
• Study Competition
Steps for Determining Prices
• Decide on a Pricing Strategy
– Price higher than the competition
because your product is superior.
– Price lower, then raise it once your
product is accepted.
– Pricing Video
• Start at 1:17
Steps for Determining Prices
• Set Price
– Monitor and evaluate its
effectiveness as conditions in the
market change.
Pricing Technology
• Smart Pricing – decisions are based on an
enormous amount of data that Web-based
pricing technology crunches into timely,
usable information.
• Communicating Prices to Customers –
electronic gadgets that provide real-time
pricing information such as electronic
shelves, digital price labels
Pricing Technology
• RFID Technology – wireless technology
that involves tiny chips imbedded in
products. The chip has an antenna, a
battery, and a memory chip filled with a
description of the item.
Illegal Pricing Strategies (Competition
can lead to unethical decisions)
• Price Fixing
– Illegal activity when competitors agree
on setting prices
• Loss-leader
– Setting the price of a product at or below
cost to entice customer to come into the
store. It’s often used with…
• Bait-and-Switch
– Advertising one product at a super-low
price then claiming to be out of stock and
selling a different one.