Pricing
Essential Questions/I Can Statements
• I CAN explain factors that influence price and
identify the four areas of pricing
• I CAN demonstrate my ability to solve cost plus
pricing formulas
• I CAN apply my knowledge of pricing and
competitive advantages to a mock business
scenario
What determines Price?
• Supply and Demand (covered last class)
• Costs
• Perceived Value
Areas of Pricing
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Cost of goods
Overhead expenses
Distribution costs
Profit margin
Cost of Goods
• Costs incurred by a business to produce or
purchase goods and services to be sold
▫ Examples: Raw materials & Parts, production
machinery, labor, etc.
Overhead Expenses
• Costs incurred to run a business
▫ Examples: Maintenance, Accounting, Advertising,
Rent &Utilities, Insurance, Management Salaries,
etc.
Distribution Costs
• Costs incurred to distribute goods and services
▫ Examples: Packaging, Storage, Shipping, Channels
of Distribution
Profit margin
• The amount of money charged above costs &
expenses
▫ Factors that effect profit margin: Markups,
discounts, competition, supply & demand
Pricing Based on Cost (Markup)
• Basic Pricing Formula:
• COST + MARKUP = RETAIL PRICE
• Complete Cost Method Pricing Worksheet
(group activity)
Pricing Based on Value
• Products that are valued highly can be set at a
high price (think back to supply and demand)
▫ Pharmaceuticals (Health)
▫ Rolex (Image)
• Reference pricing
▫ Vaseline lip balm
▫ Water bottles
Michael Porter’s Competitive Advantage
• Cost Leadership-focuses on providing goods at
the lowest possible price to consumers
▫ Cost plus pricing
▫ Ex: Wal-mart
• Differentiation-focuses on providing the best or
most unique goods to consumers
▫ Value Pricing
▫ Ex: Rolex
• Focus-focuses on providing goods to the small
segment of consumers whose wants are not being
met by general industry
▫ Cost plus or value pricing
▫ Ex: Gatti’s Pizza (hint: can be combined with either
strategy above)
Hot Dog Activity!