Lesson 1: PricingLesson 1: Pricing

ObjectivesObjectives

You will:You will: Calculate price based on unit cost and desired Calculate price based on unit cost and desired

profitprofit Compute margin based on price and unit costCompute margin based on price and unit cost Maximize profit by analyzing and adjusting Maximize profit by analyzing and adjusting

price and marginprice and margin Explain the relationship between price, Explain the relationship between price,

demand, and profitsdemand, and profits Change product pricing to remain competitiveChange product pricing to remain competitive

1. Determining Selling 1. Determining Selling PricePrice

PricePrice - - the amount of money a business the amount of money a business charges for items it offers for salecharges for items it offers for sale

Must consider two things:Must consider two things: CostCost - - the amount of money the store pays to the amount of money the store pays to

purchase the merchandise from a supplierpurchase the merchandise from a supplier ProfitProfit – total revenue of a business less all – total revenue of a business less all

expensesexpenses Consider factors of discountsConsider factors of discounts Each product a business sells SHOULD contribute to the Each product a business sells SHOULD contribute to the

business’s profitbusiness’s profit Must consider overhead costs and operating expensesMust consider overhead costs and operating expenses

Ie: paying employees, paying rent, electricity bills, etc.Ie: paying employees, paying rent, electricity bills, etc.

2. Margin2. Margin

The difference between the retail price of The difference between the retail price of an item and the cost of the item to the an item and the cost of the item to the storestore

AKA markupAKA markup Represented as a %Represented as a % An item with a cost of $5 that sells for An item with a cost of $5 that sells for

$7.50 has a markup of $____. What $7.50 has a markup of $____. What percentage is the markup?percentage is the markup?

3. Pricing and 3. Pricing and CompetitionCompetition

Pricing to ‘meet the competition’ – scoping out Pricing to ‘meet the competition’ – scoping out what your products sell for in other competitors’ what your products sell for in other competitors’ stores and pricing yours the samestores and pricing yours the same

Pricing below competitors – hope for a larger Pricing below competitors – hope for a larger quantity to be sold, which will increase profitsquantity to be sold, which will increase profits Can create price warsCan create price wars

Pricing above competitors – successful if Pricing above competitors – successful if customers feel there is extra value or customers feel there is extra value or convenience in purchasing at the store with the convenience in purchasing at the store with the higher pricehigher price

4. Supply and Demand4. Supply and Demand

The amount of product available to sell The amount of product available to sell and the willingness of customers to buy and the willingness of customers to buy that product.that product.

Merchandise not readily available or that Merchandise not readily available or that is low in supply can create higher is low in supply can create higher customer demand and pricescustomer demand and prices

5. What happens when a 5. What happens when a price it too high or too low?price it too high or too low?

Too high – customers won’t see enough Too high – customers won’t see enough value for their dollar in the merchandise value for their dollar in the merchandise and won’t purchase itand won’t purchase it

Too low – (Too low – (SIGNIFICANTLYSIGNIFICANTLY lower) – lower) – customers may assume there is customers may assume there is something wrong with the product and something wrong with the product and not purchase itnot purchase it

6. Market Share6. Market Share

The % that a store has of the total sales The % that a store has of the total sales in its areain its area

Provides important indication of how well Provides important indication of how well the store is doing compared to its the store is doing compared to its competitorscompetitors

Lower prices can increase market share, Lower prices can increase market share, higher prices can decrease market sharehigher prices can decrease market share

7. Markdowns7. Markdowns

Reducing the price of merchandise that is Reducing the price of merchandise that is not selling wellnot selling well

Well-promoted markdowns can help Well-promoted markdowns can help attract more customers to the storeattract more customers to the store

Considered a normal part of doing Considered a normal part of doing business and should be considered when business and should be considered when planning pricesplanning prices

8. Pricing Laws8. Pricing Laws

Passed by state and federal government to Passed by state and federal government to protect customers from unfair pricingprotect customers from unfair pricing Sherman Anti-Trust Act of 1890Sherman Anti-Trust Act of 1890 – makes – makes

monopolies illegal, covers price fixing (where monopolies illegal, covers price fixing (where competitors get together to set the price)competitors get together to set the price)

Clayton Anti-Trust Act of 1914Clayton Anti-Trust Act of 1914, Robinson-Patman , Robinson-Patman Act of 1936 – outlawed price discrimination Act of 1936 – outlawed price discrimination (charging different prices to different customers of (charging different prices to different customers of protected classes)protected classes)

Consumer Goods Pricing Act of 1975Consumer Goods Pricing Act of 1975 – established – established MSRP – manufacturer’s suggested retail priceMSRP – manufacturer’s suggested retail price

9. Key Math Concepts9. Key Math Concepts

1.1. Price = Cost + Desired ProfitPrice = Cost + Desired Profit

2.2. Margin = Price – CostMargin = Price – Cost

3.3. Markup Amount = Cost x Markup PercentageMarkup Amount = Cost x Markup Percentage

4.4. Markup Price = Cost + Markup AmountMarkup Price = Cost + Markup Amount

5.5. Markdown Amount = Price x PercentageMarkdown Amount = Price x Percentage

6.6. Markdown Price = Current Price – Markdown Markdown Price = Current Price – Markdown AmountAmount

10. Examples10. Examples

1.1. Calculate the price of an item that has a cost Calculate the price of an item that has a cost to the business of $3.50 and a desired profit to the business of $3.50 and a desired profit of $1.00.of $1.00.

2.2. Calculate the margin of an item with a price Calculate the margin of an item with a price of $9.00 and a cost of $4.50.of $9.00 and a cost of $4.50.

3.3. Calculate the new price of an item that costs Calculate the new price of an item that costs $7.50 and receives a markup of 40%.$7.50 and receives a markup of 40%.

4.4. Calculate the new price of an item that sells Calculate the new price of an item that sells for $12.00 and will get a markdown of 30%.for $12.00 and will get a markdown of 30%.

AnswersAnswers

1.1. $3.50 + $1.00 = $4.50$3.50 + $1.00 = $4.50

2.2. $9.00 - $4.50 = $4.50$9.00 - $4.50 = $4.50

3.3. $7.50 x .40 = $3.00$7.50 x .40 = $3.00

$7.50 + $3.00 = $10.50$7.50 + $3.00 = $10.50

4. $12.00 x .30 = $3.604. $12.00 x .30 = $3.60

$12.00 - $3.60 = $8.40$12.00 - $3.60 = $8.40