Lesson 1: Pricing

1. Lesson 1: Pricing

2. Objectives You will: • Calculate price based on unit cost and desired profit • Compute margin based on price and unit cost • Maximize profit by analyzing and adjusting price and margin • Explain the relationship between price, demand, and profits • Change product pricing to remain competitive

3. 1. Determining Selling Price • Price - the amount of money a business charges for items it offers for sale • Must consider two things: • Cost - the amount of money the store pays to purchase the merchandise from a supplier • Profit – total revenue of a business less all expenses • Consider factors of discounts • Each product a business sells SHOULD contribute to the business’s profit • Must consider overhead costs and operating expenses • Ie: paying employees, paying rent, electricity bills, etc.

4. 2. Margin • The difference between the retail price of an item and the cost of the item to the store • AKA markup • Represented as a % • An item with a cost of $5 that sells for $7.50 has a markup of $____. What percentage is the markup?

5. 3. Pricing and Competition • Pricing to ‘meet the competition’ – scoping out what your products sell for in other competitors’ stores and pricing yours the same • Pricing below competitors – hope for a larger quantity to be sold, which will increase profits • Can create price wars • Pricing above competitors – successful if customers feel there is extra value or convenience in purchasing at the store with the higher price

6. 4. Supply and Demand • The amount of product available to sell and the willingness of customers to buy that product. • Merchandise not readily available or that is low in supply can create higher customer demand and prices

7. 5. What happens when a price it too high or too low? • Too high – customers won’t see enough value for their dollar in the merchandise and won’t purchase it • Too low – (SIGNIFICANTLY lower) – customers may assume there is something wrong with the product and not purchase it

8. 6. Market Share • The % that a store has of the total sales in its area • Provides important indication of how well the store is doing compared to its competitors • Lower prices can increase market share, higher prices can decrease market share

9. 7. Markdowns • Reducing the price of merchandise that is not selling well • Well-promoted markdowns can help attract more customers to the store • Considered a normal part of doing business and should be considered when planning prices

10. 8. Pricing Laws • Passed by state and federal government to protect customers from unfair pricing • Sherman Anti-Trust Act of 1890 – makes monopolies illegal, covers price fixing (where competitors get together to set the price) • Clayton Anti-Trust Act of 1914, Robinson-Patman Act of 1936 – outlawed price discrimination (charging different prices to different customers of protected classes) • Consumer Goods Pricing Act of 1975 – established MSRP – manufacturer’s suggested retail price

11. 9. Key Math Concepts • Price = Cost + Desired Profit • Margin = Price – Cost • Markup Amount = Cost x Markup Percentage • Markup Price = Cost + Markup Amount • Markdown Amount = Price x Percentage • Markdown Price = Current Price – Markdown Amount

12. 10. Examples • Calculate the price of an item that has a cost to the business of $3.50 and a desired profit of $1.00. • Calculate the margin of an item with a price of $9.00 and a cost of $4.50. • Calculate the new price of an item that costs $7.50 and receives a markup of 40%. • Calculate the new price of an item that sells for $12.00 and will get a markdown of 30%.

13. Answers • $3.50 + $1.00 = $4.50 • $9.00 - $4.50 = $4.50 • $7.50 x .40 = $3.00 $7.50 + $3.00 = $10.50 4. $12.00 x .30 = $3.60 $12.00 - $3.60 = $8.40