Chapter 10
PRICING
Total Pricing Concept
1) The total cost of the item to be sold must be covered. This includes the direct
expenses and the operating and overhead expenses incurred in operating the
business.
2) Pricing must contribute to the long term stability of the business. There must be
enough profit to be able to put back into the business for future growth and
development.
3) The entrepreneur must be rewarded for the effort expended and the risk
assumed in owning and running the business.
4) Customers must perceive the price as giving a fair value.
Supply & Demand
 Proper allocation of goods and services to the market at an affordable cost
helps maintain a healthy economy.
 Consumers can buy only what they can afford.
 If products priced to high, product will not sell and production will have to
be slowed or stopped.
 The Entrepreneur’s Goal is to find the price point that allows a balance
between supple and demand.
Breakeven Point - Figure 10-2 Page 209
 The cost of producing and/or selling a product or service is covered.
 Analyze the fixed costs first because these do not change during production or by
sales volume. (Ex. Rent, utilities, insurance, etc.)
 Next, analyze you variable costs which fluctuate with changes in production and
sales volume.
 Once the breakeven point is reached, additional sales produce profit for the
entrepreneur.
 Contributing Margin is the gross profit derived from the sale of the product. Or
the selling the price less the cost of the goods or materials.
 Breakeven Formula – Fixed costs divided by Contributing margin = Breakeven
Point.
Markups & Markdowns page 211
 Markup is the amount added to the cost of an item to arrive at a selling price.
 Markdown is the difference between the original selling price and the price at
which an item is actually sold.
 Find the Cost. When the selling price and markup percentage are known,
“Multiply the selling price by the markup percent and subtract the answer from
the selling price.”
 Find the Markup Percent. Subtract the cost from the selling price. Divide the
difference by the selling price.
Protecting Your Profit Margin
 Many small businesses fail to protect their margins.
 Too often entrepreneurs engage in price wars with larger competitors, which
results in severely decreased profits
 Calculations on Page 211.
Taking Markdowns
 Markdowns are taken on items when a product does not sell at the desired price.
 When a product is “on sale,” its original selling price has been reduced.
 Reasons for taking markdowns:
 Damaged Merchandise – cannot be sold at original price.
 Old Merchandise – obsolete, taking up space.
 Broken assortments – Intended to be sold in sets but lost their salability
when sold in parts.
 Special Promotions – Low prices are offered to increase demand and
customer traffic for all items.
 Limited Space – Make room for new inventory.
Pricing Strategies
 Skimming. Short-term profit strategy often used for products that are not
expected to remain on the market for an extended period of time.(Fads/these
products carry a high risk)
 Market Penetration Pricing. Used to introduce a new product or business with
an expected long-term life cycle. Gain market share by setting a low price at their
competitor’s expense.
 Loss Leader Pricing. Strategy that purposely prices some products at a level that
eliminates profit and incurs losses on those particular products. These increases
customer traffic and hopefully purchase normal profitable items.
 Price Lining. When businesses group products at certain price points. By
grouping items they make shopping easy for the consumer and average out their
desired markup.
 Price Bundling. Selling a product in multiple units, “three for the price of two.”
This is similar to penetration pricing in that it can increase market share. It can
also be used to reduce inventory.
 Status Quo Pricing. Price levels are firmly established until something in the
marketplace that requires a change or adjustment.
 Price Points. You must understand the psychology of violating price levels in
which consumers feel comfortable. Even ended pricing suggests higher end
products. Prices ending in .99 suggest they are getting a deal.
 Discounts. The entrepreneur cannot compete strictly on price. Profits are made
through differentiation and customer service.
Factors That Affect Prices
External Factors – Elements that indirectly affect business operations.
 Economic Cycles. Mention of economic changes in the news will encourage or
discourage consumer buying.
 Societal Changes. Societal attitudes affect the marketplace and price
acceptability.
 Technological Developments. New technology may leave a business with
obsolete products. New Tech. also offers great opportunity for entrepreneurs.
 Substitute Products. Established business owners must be on the watch for what
is coming next and prepare.
 New Competition. New entrants into a market have an immediate impact. Your
business must react accordingly.
Internal Factors – Elements within your business that directly affects prices.
 Increase in Fixed or Variable Costs. Business must adjust which usually results
in price increase to protect profit margin.
 Supplier Shortage. My limit competition. However if you are designed not to
carry inventory, sales of these products now become limited.
 New Technology. Business can improve efficiency with better technology.
Legal Considerations
 Price Discrimination. Charging different prices for different customers for the
same goods is called price discrimination. May be illegal. (Maybe OK if you
demand a large minimum order to get the price, Ex. Wal-Mart)
 Tie-in Sales. It is not legal if the customer must also buy another product that is
not related directly to the original offer.
 Types of Prices.
 List Price is the standard price charged to customers.
 Net Price after all discounts is subtracted.
 Zone Price is set for a particular geographic area.
 FOB/free on board pricing has the buyer paying the transportation charges
to deliver the products is passed onto the customer.
Fair Value - Customer’s search for products that give the best satisfaction in exchange
for their money.
 Customer’s View of Quality- The market has changed from the product concept
of marketing to the people concept of marketing. Focus is on the consumer and
not the product.
 Managing Quality- Entrepreneurs who pirce gouge the market with inferior
products will not be successful in the long-term.
 Price Objections- Price is the hidden objections when it comes to selling.
Customers may use other excuses because they do not want to address the price
they consider too high.
Pricing Criteria
1) Compute what will be required to cover the four points of the total pricing
concept.
2) Determine the breakeven point.
3) Gather info. On competitor’s prices and how long they have maintained
those prices.
4) Ask selected representatives of the target market for a focus group or
input.
5) Ask members of the industry what has worked for them.
6) If necessary experiment. Keep in mind that it is easier to lower prices than
to raise the.
7) Examine your image and what the consumer will pay for that image.
8) Scan the business environment for external and internal factors that may
influence customer buying attitudes.
9) Give careful consideration to the chosen strategy and its long-term goal.
10) Determine the best way to defend you prices when questions and
objections are raised.
Homework
1) Ethics for Entrepreneurs
2) The Global Entrepreneur
3) Ship In a Bottle
4) A Case in Point
5) Read Chapter 11
Page 218
Page 222
Page 224 & 225
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