Download SBE09.03

9.00 Explain pricing strategies for
making effective pricing decisions.
D. MARKETING A
SMALL BUSINESS
9.03 Calculate the
selling price of
merchandise and
services.
Profit


Revenue remaining after the expenses of
running the business have been deducted.
Factors that affect profit:
–
–
–

demand
prices
chance
-- business expenses
-- the economy
Ways to increase profit
–
–
increase worker efficiency-- increase sales
reduce business expenses
Cost of Merchandise Sold



The amount paid by a
business for products
purchased for resale or
for use in the
production of other
goods.
The first expense that
must be paid.
Is deducted directly
from sales revenue to
determine gross profit.

Formula (used on the
income statement):
Sales Revenue
- Cost of merchandise sold
Gross profit
- Business Expenses
Net profit
Basic Pricing Calculations
Retail Price = Cost + Markup
RP = C + MU
Variations of the equation
C = RP - MU
MU = RP - C
Keystone Pricing
–
–
A common pricing
method used by
retailers.
Retail price is
calculated by
doubling the cost of
the merchandise.
 cost
= $25.00
 retail price = $50.00
Markdowns



The most common type of price change
Used as a tool to stimulate sales, dispose of
slow moving products, meet competitor’s
prices, and/or increase customer traffic
Markdowns are expressed as a % of net sales.
MARKDOWN PERCENTAGE (MD%) = DOLLAR
MARKDOWN ($MD)/Net Sales (NS)

MD% cannot be calculated until goods are sold
because they are based on net sales.
Reasons for Markdowns
Buying errors
 Pricing errors
 Special sales
 Broken assortments

Quantity Discounts

Reductions in price given by
manufacturers/wholesalers when a large
or specified quantity is purchased.
–
–
Cumulative quantity discounts: Based on
total purchases over a specified period of
time.
Non-cumulative quantity discounts: Given
for a one-time purchase or shipment.
Trade Discounts



Also called functional discounts
Offered to channel members for performing
certain functions like storing or record
keeping
Can be stated as a percentage off the list
price or as a series of percentages off the
list price. Example: “List price less 45%”
or “List price less 30%, less 15%, less 5%
($2000 less 30/12/5)”
Cash Discounts
Offered to buyers
as an incentive
for paying the
invoice quickly.
Cash Discounts

Ordinary dating
– based on the
date of the
invoice
– 2/10, net/30

buyer receives a 2%
discount if the
invoice is paid within
10 days, or the full
(net) amount is due
in 30 days

Advanced dating
– indicates that the
payout period does
not begin until the
date indicated in the
terms
– 5/10, net/30, June 15

buyer receives a 5%
discount if the invoice is
paid within 10 days of June
15, or the full amount is due
30 days from June 15
Cash Discounts

End-of-month dating
– The payout period does
not begin until the last
day of the month in
which the invoice is
dated.
– 2/10, net/30, EOM

2% discount if the invoice
is paid within 10 days of
the last day of the month
of the invoice, or the full
(net) amount is due 30
days from the last day of
the month

Receipt-of-Goods dating
– The payout period
does not begin until
the buyer receives the
goods from the seller.
– 2/10, net/30, ROG

2% discount if the
invoice is paid within
10 days of receiving
the goods, or the full
(net) amount is due 30
days from when the
goods are received
Cash Discounts

Extra dating
– The buyer has
additional days in
which to pay and still
receive the cash
discount.
– 3/10, 60X, net 90

a 3% discount if the
invoice is paid within 10
days plus 60 days from
the invoice date, or the
full (net) amount is due
in 90 days