Pricing Strategies

# Pricing Strategies

## Pricing Strategies

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##### Presentation Transcript

1. Pricing Strategies E1 Obj. 5.02 Formulas Practice Problems

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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.

10. 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

11. 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

12. 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

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

14. 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.

15. 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

16. 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?

17. 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

18. 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

19. 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

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

21. 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

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

23. 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

24. 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

25. 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

26. 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

27. 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