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CHAPTER
PRICING AND
PROMOTION
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23
OBJECTIVES
Discuss how businesses and consumers make their buying
decisions.
Describe factors involved in establishing product prices and
common pricing strategies.
Discuss ways that companies try to control costs that can
lead to higher prices.
Discuss the purpose of promotion in meeting business and
consumer needs.
Identify the common promotional methods.
Explain the parts of the selling process and how each is
used to help customers make effective buying decisions.
Identify important laws and regulations that apply to
advertising and promotion.
The Business Buying Decision
 What to purchase
 Keeping the right kind of products in stock
 Quality vs. Price
 Factors: competition and financial ability
of business
 When to purchase
 Factors: location of supplier, style and price
trends
 Available when needed
The Business Buying Decision
 From whom to purchase
 Choose the right supplier
 Cost, service, reputation
 Having one main supplier provides better
deals but always have a few alternatives
that you also use
 Most businesses concentrate their buying
among a few suppliers
 How much to purchase
 Sufficient to meet customer demand
 Too much results in capital not being
available
Payment Terms and Discounts
 Payment terms - 2/10 net/30
 2% discount if paid in 10 days or pay net (full)
in 30 days
 Discounts - are reductions from the LIST price
(not selling price) of the product to encourage
customers to buy.
 Trade - a price reduction that manufacturers
give to their channel partners, such as
wholesalers or retailers, in exchange for
additional services.
 Quantity - a price reduction offered to
customers that buy in quantities larger than a
specified minimum
Payment Terms and Discounts
 Seasonal - a price reduction offered for
ordering or taking delivery of products in
advance of the normal buying period.
 Cash - a price reduction given for
paying by a certain date w/ cash
(usually stated as a percentage of the
purchase price).
COMPONENTS OF PRICE
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Selling price
Cost of goods sold
Operating expenses
Margin or gross profit
Net profit
Markup
Markdown
COMPONENTS OF PRICE
 Selling price- the actual price customers pay
for the product. Determined by subtracting any
discounts from list price. CGS + operating
expenses + net profit = selling price
 Cost of goods sold- (CGS) the cost to
produce the product (cost of materials/
operations/personnel); for whole/retail sellers its
the price they pay their supplier to buy the
product PLUS the cost of transporting it to their
location for resale.
 Operating expenses- the costs of operating a
business. Doesn’t include costs involved in
actual production or purchase of merchandise.
 Margin or gross profit- the difference between
the selling price and the cost of goods sold.
 Net Profit- the difference between the selling
price and all costs and expenses of the business.
Net profit= selling price - CGS - operating
expenses
 Markup- the amount added to the cost of goods sold to
determine the selling price.
 Markdown- any amount by which the original selling
price is reduced before the item is sold. Companies use
markdowns when their inventory is not selling at a
satisfactory rate.
COMPONENTS OF
SELLING PRICE
$1.00 Selling Price
$.60
Cost of Goods Sold
$.35
Operating Expenses
$.05
Net Profit
$.40 Margin or Gross Profit
PRICING
STRATEGIES
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Pricing to meet competition
Pricing to earn a specific profit
Pricing based on consumer demand
Pricing to sell more products
Pricing to provide customer services
Controlling Costs
 Markdowns
 these happen because companies have
purchased products that customers do not
want or have gone out of style
 they can be controlled by careful purchasing,
proper product handling, and marketing
practices
Controlling Costs
 Damaged or stolen merchandise
 these situations have a serious affect on
profits
 to reduce damaged or stolen merchandise,
companies can employ security guards,
install surveillance cameras, and train
employees to handle merchandise carefully
Controlling Costs
 Returned merchandise
 adds to expenses in 2 ways:
 if the business can resell the merchandise,
it will have to be sold at a reduced price
 also many expenses are involved in
handling and reselling the returned
merchandise, which increase operating
expenses
 Review Facts
 1-10
 Discussion Ideas
 3,5,6,7,
 Analyze Info
 1,2
MY BUSINESS
Product based businesses
Create a policy regarding any discounts you plan
to offer.
Create a guideline as to how you will deal with
selling old products (markdowns, etc.)
Create and finalize a "return" policy for your
business.
Service businesses
If you are or not selling an item, create and finalize
a process that a customer will take when they
are not satisfied with your service. Use the
internet to look up examples of return policies.
Create a policy regarding any discounts you plan
to offer.