standard 4 - pricing standard 4 day 1. explain the nature and scope of the pricing function...
DESCRIPTION
What is Price? Price is the value of money (or its equivalent) placed on a good or service.TRANSCRIPT
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Standard 4 Day 1
• Explain the nature and scope of the pricing function–Understand the concept of
break-even point
What you’ll learn
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What is Price?
Price is the value of money (or its equivalent) placed on a good or service.
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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
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Importance of Price• Establishes image• Maintains
competitive edge• Determines profits
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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?
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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
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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
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Goals of Pricing• Gaining market share – a firm’s
% of total sales volume in a given market
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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.
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Standard 4 Day 2
Understand how basic economic principles affect pricing
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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
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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.
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Supply & Demand Graph
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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.
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Steps for Determining Prices• Establish Pricing
Objectives– Increase sales volume?– Prestigious image?– Increase market share?
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Steps for Determining Prices
• Study Costs–Can you make a profit?–Can you reduce costs without
affecting quality or image?
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Steps for Determining Prices• Estimate Demand
– What do customers expect to pay?– Prices usually are directly related to
demand.
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Steps for Determining Prices
• Study Competition
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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
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Steps for Determining Prices
• Set Price–Monitor and evaluate its
effectiveness as conditions in the market change.
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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
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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.
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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.