Pricing Strategies

Pricing Strategies E1 Obj. 5.02 Formulas Practice Problems

Basic Markup Calculations Cost + Markup Retail Price Retail Price Retail Price - Markup - Cost Cost Markup C $14 M + 6 PR 20 RP $20 RP $20 M - 6 C -14 C 14 M 6

Try these basic markup calculations • A calculator costs $15, & the markup is $10. What is the retail price? • A tennis racket retails for $175, & its markup is $85. What is its cost? 3. A baseball bat retails for $45, & its cost is $22. What is its markup? Answers on the next slide

Check Your Answers Cost + Markup Retail Price Retail Price Retail Price - Markup - Cost Cost Markup C $ 15 M + 10 PR 25 RP $175 RP $45 M - 85 C -22 C 90 M 23 1 2 3

Percentage Markup Determine the dollar markup: Retail Price $82.50 - Cost -49.50 Markup 33.00 To change the dollar markup to the % markup: Markup/Retail Price 33/82.50=.4 Or .40 = 40% Determine the dollar markup: Retail Price $82.50 - Cost -49.50 Markup 33.00 To change the dollar markup to the % markup: Markup/Retail Price 33/82.50=.4 Or .40 = 40

Appropriate Selling Price Which of the following is an appropriate selling price for a product with total costs of $10 and a gross margin of $5? (Gross margin is the difference between revenue and cost) $10 + 5 = $15 appropriate selling price

What is an appropriate selling price? • Cost = $8.45 • Operating expenses = $ 0.50 • Profit = $ 0.80 • $8.45 + .50 + .80 = $9.75

Ceiling Prices • The maximum amount a seller would charge for an item/service. • What primary factors do business owners consider when determining the ceiling prices of their products? • Consumer perceptions and demand of the product

List Price • The starting point for determining the final cost of a product to a company. It is the published price to start negotiations. • From the list price, businesses negotiate discounts and transportation charges that are deducted from the published/list price to arrive at a final price.

Calculating Discounts What is the final cost to the business of a product priced at $40 with a 20% trade discount from the vendor? (trade discount is a deduction from the list price for performing certain marketing activities) $40 x .20 = $8 discount $40 – 8 = $32 final cost

Calculating Discounts What is the final cost to the business of a product priced at $125 with a 35% discount from the vendor? $125 x .35 = $43.75 discount $125 – 43.75 = $81.25 final cost

Calculating Discounts A business bought 144 items at 6.50 ea and 120 items at $3.75 ea. With a 20% discount, the total cost to the business is? 144 x $6.50 + 120 x $3.75= 936 + 450 = 1386 $1386 x .20 = $277.20 discount $1386 – 277.20 = $ 1108.80 final cost

A business determines the final cost of a product purchased for resale by subtracting allowed discounts and the transportation charges from the _____________. • LIST PRICE

Setting the Selling Price • Businesses set the selling price at a level that will cover expected markdowns and expenses. • By predicting expenses and markdowns, the business will continue to make a profit even after offering items at a “discount” to consumers.

Calculate Break Even Point If a business has total fixed costs of $900,000; the unit selling prices is $800, & the variable cost per unit is $300. What is the Break Even Point in dollars? Selling Price $ 800 Variable Cost Per Unit - 300 Variable Cost Margin 500 Total Fixed Costs/Variable Cost Margin= Break Even Point $900,000/500 = $1800 BP

Break Even Point • The truck rental is $200 per week and a yearly license fee is $52 for the truck. • Costs are $200 for 500 ice cream bars that will be sold for $1.10 each. • How many units/ice cream bars must be sold each week in order to reach the Break Even Point?

Part 1 Fixed Costs Truck Rental + weekly license fee $200 + ($52/52 weeks) = $201 Total Cost of Ice Cream / Number of Units to be Sold = Variable Costs $200/$500 = $0.40

Part 2 Selling Price $ 1.10 Variable Cost Per Unit - .40 Variable Cost Margin .70 Total Fixed Costs/Variable Cost Margin= Break Even Point $201/.70 = 287.14 or 288 units

Break-Even Analysis – The level of sales at which revenues equal total costs (Fixed Costs) / (unit selling price – variable costs)= Number of units needed to break-even

Selling Price Selling price – the actual or projected price per unit

Markup • The amount added to the cost of an item to cover expenses and ensure a profit • cost + markup = price • price – markup = cost • price – cost = markup

Markdown • The amount of money taken off an original price • Price * Markdown Percentage = • Dollar $ Markdown • Price – Markdown = Sales Price)

Discounts • Apricing technique that offers customers reductions from the regular price; some reductions are basic percentage off discounts and others are specialized discounts • Price x Discount Percentage = Discount Dollars • Price – Discount Dollars = Discounted Price

Pricing Strategy Decisions ◦Cost-based pricing – where you consider your business costs and your profit objectives ◦demand-based pricing – requires you to find out what customers are willing to pay for your product, then set the price accordingly ◦competition-based pricing – you need to find out what your competitors charge, then decide what you should charge for your product

Product Life Cycle Pricing Stage 1: Introduction – sales volume is relatively low marketing costs are high, and profits are low or even in the negative Stage 2: Growth – sales climb rapidly, units costs are decreasing, the product begins to show a profit, and competitors come into the market Stage 3: Maturity – sales begin to slow and profits peak, but profits fall of as competition increases Stage 4: Decline – sales and profits continue to fall

Pricing Techniques • Psychological pricing – a pricing technique, most often used by retail businesses, that are based on the belief that customers' perceptions of a product are strongly influenced by price, odd/even pricing, price lining, promotional pricing, multiple-unit pricing, and bundle pricing ▪ Prestige pricing – a pricing technique in which higher-than-average prices are used to suggest status and prestige to the customer ▪ Odd/even pricing – a pricing technique to which odd-numbered prices are used to suggest bargains ▪Price lining – a pricing technique in which items in a certain category are priced the same ▪Discount pricing – a pricing technique that offers customers reductions from the regular price; some reductions are basic percentage-off discounts and others are specialized discounts

Price Skimming – the practice of charging a high price on a new product or service in order to recover costs and maximize profits as quickly as possible; the price is then dropped when the product or service is no longer unique Penetration Pricing – a method used to build sales by charging a low initial price to keep unit costs to customers as low as possible Promotional pricing – a pricing technique in which lower prices are offered for a limited period of time to stimulate sales Multiple-unit pricing- a pricing technique in which items are priced in multiples Bundle pricing – a pricing technique in which several complementary products are sold at a single price, which is lower than the price would be if each item was purchased separately Pricing Techniques

Pricing Strategies