UNIT E
PRODUCT/SERVICE
MANAGEMENT AND
PRICING
9.02 Exemplify pricing objectives,
policies, and strategies.
Operating expenses
Debts incurred in the routine operation of
a business.
 Variable
expenses: Expenses that change
from one month to the next depending on
the needs of the business
 Fixed expenses: Expenses that remain the
same over a specific period of time.
Cost of goods sold
The total amount spent to produce or to
purchase the goods that are sold.
**The largest single factor in establishing
retail price of products.
Profit
Profit (return): The money earned from
conducting business after all costs and
expenses have been paid.
 Income: Money coming into the business
from the sale of goods or services.
 Gross profit (margin): The difference
between the selling price (sales revenue)
and the cost of goods sold.

Profit (cont.)
Net profit (net income): The amount left
after the total expenses are subtracted
from gross profit. Generally this
amounts to 1-5%.
 Return on investment (ROI): A
calculation that is used to determine the
relative profitability of a product.
Calculated by dividing net profit by
total investment

Markdown
A reduction in selling price used to reduce
inventory as a result of buying errors,
promotional pricing, or sales techniques.

Retail Price x Markdown % = Markdown $
 Example:

$150 x 30% = $45
Retail Price – Markdown $ = Sale Price
 Example:
$150 - $45 = $105
Pricing approaches
Demand-oriented pricing: Pricing based
on what consumers are currently willing
to pay for a product.
 Competition-oriented pricing: Prices set
on the basis of what competitors charge.

Pricing approaches (cont.)

Cost-oriented pricing: Pricing based
on the cost of the product plus a
markup or desired profit.
 Markup
pricing—A predetermined
markup percent is added to the cost of
all goods sold to reach a selling price.
This is the simplest pricing method.
 Cost plus pricing—All costs and
expenses for a particular product are
added to the desired profit to determine
the selling price. (This is similar to
markup, but expenses are calculated
separately for each individual item.)
Pricing techniques

Product mix pricing strategies
 Price
lining: A special pricing technique
that sets a limited number of prices for
specific groups or lines of merchandise.
Price lines must have enough differentiation
so that the business has a low, middle, and
high range of pricing.
 Example: A store might sell its merchandise
for $15, $40, and $85.

Pricing techniques (cont.)

Product mix pricing
strategies
 Optional
product pricing:
Pricing for accessories or
options sold with the main
product. Example:
Automatic transmission,
air conditioning, and/or a
moon roof are options
that may be added to a
car at an additional price.
Pricing techniques (cont.)

Product mix pricing strategies
 Captive
product pricing: Sets the price for
a primary product low, but compensates for
that low price by pricing the supplies
needed to operate that product high.
Example: Ink-jet printers are fairly
inexpensive, but the ink cartridges needed
for the printer are expensive.
Pricing techniques (cont.)

Product mix pricing strategies
 By-product
pricing: Sets prices on products
produced during production of other
products.
Prices are generally low.
 Example: Wood chips created as a by-product
of work done by a tree service would be
inexpensive.

 Geographical
pricing: Pricing to include
charges necessary to get the product
delivered to the customer’s location.
Pricing techniques (cont.)

Product mix pricing strategies
 Bundle
pricing: Packaging and selling
complementary products along with the
primary product at a single price.
Allows a company to include more items for sale
to its customers, and in turn, increase its sales and
profits.
 Example: Bundling a PC with software and a
printer

Pricing techniques (cont.)

Product mix pricing strategies
 International
pricing: Setting price based
on costs, consumers, economic conditions,
and monetary exchange rates. Costs that
need to be considered include shipping
charges and tariffs.
Pricing techniques (cont.)

Segmentation pricing strategies
 Buyer
identification pricing: Pricing that
offers consideration to buyer segments
based on special characteristics of the
segment. Example: Offering discounts to
senior citizens, many of whom are on fixed
incomes
 Product design pricing: Pricing different
styles of products due to demand.
Pricing techniques (cont.)

Segmentation pricing strategies
 Purchaser
location pricing: Pricing
according to where a product is sold and/or
the location of the product. Example:
Broadway tickets for a show in New York
City cost more than tickets for the same
show performed in Charlotte, NC.
 Time-of-purchase pricing: Pricing based
on peak/non-peak business seasons.
Example: The price of an oceanfront
hotel room in July versus the price of the
same room in January.
Pricing techniques (cont.)

Psychological pricing strategies
 Odd-even
pricing: A pricing technique that
involves setting prices that all end in either odd
or even numbers.
Odd numbers such as $9.99 or $.79 convey a
bargain.
 Even numbers such as $20 and $100 convey an
image of quality.

• Prestige pricing: A pricing strategy that
sets higher-than-average prices to suggest
status and high quality to the consumer.
Example: Rolls Royce and Waterford
Crystal are priced high due to their
prestigious image.
Pricing techniques (cont.)

Psychological pricing
strategies
 Multiple-unit
pricing: Pricing
items in multiples. Example:
Candy bars 3 for $1.00 seems to
be a better deal than 3
individual items for $.34 each.
 Everyday low prices: Setting low
prices on a consistent basis with
no intention of raising them or
offering discounts in the future.
Pricing techniques (cont.)

Promotional pricing
 Loss
leader pricing: Offering very popular
items of merchandise for sale at below-cost
prices to increase store traffic.
The hope is that the increase in customer traffic
in the store to buy the bargain item will also
result in increased sales of regular price items.
 Example: Two 12-can packs of soda for $5.00

 Special
event pricing: Offering reduced
prices for a short period of time for specific
events of promotions. Example: Back-toschool or President’s Day sales
Pricing techniques (cont.)

Promotional pricing
 Rebates:
Partial refunds provided by the
manufacturer to consumers who mail in
proof of purchase according to
manufacturer guidelines.
 Coupon: A printed voucher that provides a
reduction in the selling price at the time of
purchase.
Pricing techniques (cont.)

Discounts and allowances
 Cash
discount: A reduction in price offered to
buyers to encourage prompt payment.
Example: An invoice has terms 2/10, net 30.
If the invoice is paid within 10 days, a 2%
discount is allowed. If payment is not made
within the discount period, the full amount is
due within 30 days.
Pricing techniques (cont.)

Discounts and allowances
 Quantity
discount: A reduction in price offered
to the buyer for placing large orders. Example:
A customer who buys 1-5 cases of paper pays
$12.00 per case. If the same customer buys 610 cases of the same paper, the price per case
decreases to $11.50.
Pricing techniques (cont.)

Discounts and allowances
 Trade
discount: A discount allowed by
manufacturers to wholesalers and retailers.
Often expressed as a discount on a
manufacturer’s suggested retail price
 Example: Suggested retail price for a paperback
novel is $12.99. The retailer price is $12.99 less
40%, or $7.79.

 Seasonal
discount: A reduction in price
offered to buyers willing to buy at a time
outside the normal buying season.
Manufacturers offer these discounts to keep
production amounts stable.