standard 4 - pricing standard 4 day 1. explain the nature and scope of the pricing function...

Standard 4 - PricingStandard 4 Day 1

Standard 4 Day 1

• Explain the nature and scope of the pricing function–Understand the concept of

break-even point

What you’ll learn

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 DifferentPrices 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

$6.50.• $8 - $6.50 = $1.50/$6.50 = .23• Your rate of return on investment is 23

percent.

Profit

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

• 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

What you’ll learn

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.