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CONTENT/TEACHING OUTLINE
Unit E: Product/Service Management and Pricing
COMPETENCY:
9.00
Analyze pricing.
OBJECTIVE:
9.02
Exemplify pricing objectives, policies, and strategies.
A. Compare operating expenses, cost, and profit.
1. Operating expenses: Debts incurred in the routine operation of a
business.
a. Variable expenses: Expenses that change from one month to the
next depending on the needs of the business. Examples: utilities,
office supplies, and advertising
b. Fixed expenses: Expenses that remain the same over a specific
period of time. Examples: rent and salaries
2. Cost of goods sold: The total amount spent to produce or to purchase
the goods that are sold. This is the primary consideration in establishing
the retail price of products.
3. Profit
a. Profit (return): The money earned from conducting business after all
costs and expenses have been paid.
b. Income: Money coming into the business from the sale of goods or
services.
c. Gross profit (gross income) (margin): The difference between the
selling price (sales revenue) and the cost of goods sold.
d. Net profit (net income): The amount left after the total expenses are
subtracted from gross profit. Generally this amounts to 1%-5%.
e. Return on investment (ROI): A calculation that is used to determine
the relative profitability of a product. ROI is calculated by dividing net
profit by the total investment.
B. Summarize markdown.
1. Markdown: A reduction in selling price used to reduce inventory as a
result of buying errors, promotional pricing, or sales techniques.
2. Calculate markdowns.
a. Retail price x Markdown % = Markdown $
Example: $150 x 30% = $45
b. Retail price - Markdown $ = Sale Price
Example: $150 - $45 = $105
C. Distinguish pricing approaches.
1. Demand-oriented pricing: Pricing based on what consumers are
currently willing to pay for a product.
2. Competition-oriented pricing: Prices set on the basis of what competitors
charge.
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3. Cost-oriented pricing: Pricing based on the cost of the product plus a
markup or desired profit.
a. 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.
b. 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.)
D. Exemplify pricing techniques.
1. Product mix pricing strategies
a. Price lining: A special pricing technique that sets a limited number of
prices for specific groups or lines of merchandise.
(1) Price lines must have enough differentiation so that the business
has a low, middle, and high range of pricing.
(2) Example: A store might sell its merchandise for $15, $40, and
$85.
b. 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.
c. 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.
d. By-product pricing: Sets prices on products produced during
production of other products.
(1) Prices on by-products are generally low.
(2) Example: Wood chips created as a by-product of work done by
a tree service would be inexpensive.
e. Bundle pricing: Packaging and selling complementary products
along with the primary product at a single price.
(1) Allows a company to include more items for sale to its customers
and, in turn, increase its sales and profits.
(2) Example: bundling a PC with the software and a printer
f. Geographical pricing: Pricing to include charges necessary to get
the product delivered to the customer’s location.
g. 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.
2. Segmentation pricing strategies
a. 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
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b. Product design pricing: Pricing different styles of products due to
demand.
c. 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, N.C.
d. 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
3. Psychological pricing strategies
a. Odd-even pricing: A pricing technique that involves setting prices
that all end in either odd or even numbers.
(1) Odd numbers such as $9.99 or $.79 convey a bargain.
(2) Even numbers such as $20 and $100 convey an image of
quality.
b. Prestige pricing: A pricing strategy that sets higher-than-average
prices to suggest status and high quality to the consumer.
Examples: Rolls Royce and Waterford Crystal are priced high due to
their prestigious image.
c. Multiple-unit pricing: Pricing items in multiples. Example: Candy
bars at 3 for a $1.00 seems to be a better deal than 3 individual
items for $.34 each.
d. Everyday low prices: Setting low prices on a consistent basis with
no intention of raising them or offering discounts in the future.
4. Promotional pricing strategies
a. Loss leader pricing: Offering very popular items of merchandise for
sale at below-cost prices to increase store traffic.
(1) 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.
(2) Example: Two 12-can packs of soda for $5.00
b. Special event pricing: Offering reduced prices for a short period of
time for specific events or promotions. Examples: back-to-school or
President’s Day sales
c. Rebates: Partial refunds provided by the manufacturer to consumers
who mail in proof of purchase according to manufacturer guidelines.
d. Coupon: A printed voucher that provides a reduction in the selling
price at the time of purchase.
5. Discounts and allowances
a. Cash 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.
b. Quantity discount: A reduction in price offered to the buyer for
placing large orders. Example: A customer who buys 1-5 cases of
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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.
c. Trade discount: A discount allowed by manufacturers to wholesalers
and retailers.
(1) Often expressed as a discount on a manufacturer’s suggested
retail price
(2) Example: Suggested retail price for a paperback novel is
$12.99. The retailer price is $12.99 less 40%, or $7.79.
d. 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.
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