9.00 Explain pricing strategies for making effective pricing decisions.

1. 9.00 Explain pricing strategies for making effective pricing decisions. 9.03 Calculate the selling price of merchandise and services. D. MARKETING A SMALL BUSINESS

2. Profit • Revenue remaining after the expenses of running the business have been deducted. • Factors that affect profit: • demand -- business expenses • prices -- the economy • chance • Ways to increase profit • increase worker efficiency -- increase sales • reduce business expenses

3. The amount paid by a business for products purchased for resale or for use in the production of other goods. The first expense that must be paid. Is deducted directly from sales revenue to determine gross profit. Formula (used on the income statement): Sales Revenue - Cost of merchandise sold Gross profit - Business Expenses Net profit Cost of Merchandise Sold

4. Basic Pricing Calculations Retail Price = Cost + Markup RP = C + MU 13.50 = 10 + 3.50 An item costs the business $10 and has a markup of $3.50. What is the retail price? Variations of the equation C = RP – MU or MU = RP – C The retail price of an item is $30.00 and the markup is $10.00. What is the cost of the item? 20 = 30 -10

5. Keystone Pricing • A common pricing method used by retailers. • Retail price is calculated by doubling the cost of the merchandise. • cost = $25.00 • KMU = $25.00 • retail price = $50.00

6. Markdowns • The most common type of price change • Used as a tool to stimulate sales, dispose of slow moving products, meet competitor’s prices, and/or increase customer traffic • Markdowns are expressed as a % of net sales. • MD% cannot be calculated until goods are sold because they are based on net sales. • Original selling price X MD % = MD, OSP– MD = Final Selling price • The original selling price of an item is $100.00 and the markdown is 30%. What is the markdown and final sales price of the item? • 100 x .3 = $30 (MD) • 100 – 30 = $70 (FSP)

7. Reasons for Markdowns • Buying errors • Pricing errors • Special sales • Broken assortments

8. Quantity Discounts • Reductions in price given by manufacturers/wholesalers when a large or specified quantity is purchased. • Cumulative quantity discounts: Based on total purchases over a specified period of time (whole purchase). • Non-cumulative quantity discounts: Given for a one-time purchase or shipment (on specific product like envelopes).

9. Trade Discounts • Also called functional discounts • Offered to channel members for performing certain functions like storing or record keeping • Can be stated as a percentage off the list price or as a series of percentages off the list price. Example: “List price less 45%” or “List price less 30%, less 15%, less 5% ($2000 less 30/12/5)” • 2000 x .3 = 600 x .12 = 72 x .05 = 3.60

10. Cash Discounts Offered to buyers as an incentive for paying the invoice quickly.

11. Ordinary dating based on the date of the invoice 2/10, net/30 buyer receives a 2% discount if the invoice is paid within 10 days, or the full (net) amount is due in 30 days Advanced dating indicates that the payout period does not begin until the date indicated in the terms 5/10, net/30, June 15 buyer receives a 5% discount if the invoice is paid within 10 days of June 15, or the full amount is due 30 days from June 15 Cash Discounts

12. Cash Discounts EXAMPLE • A retailer received a shipment of goods on January 5 for $700.00. The invoice is dated December 9 and the terms are 2/10, net/30, ROG. • When must payment be made in order to receive the discount? • January 15 • What amount do you owe if you take the discount? • 686 • What is the latest date for full payment? • February 4 • Receipt-of-Goods dating • The payout period does not begin until the buyer receives the goods from the seller. • 2/10, net/30, ROG • 2% discount if the invoice is paid within 10 days of receiving the goods, or the full (net) amount is due 30 days from when the goods are received

13. End-of-month dating The payout period does not begin until the last day of the month in which the invoice is dated. 2/10, net/30, EOM 2% discount if the invoice is paid within 10 days of the last day of the month of the invoice, or the full (net) amount is due 30 days from the last day of the month Cash Discounts EXAMPLE • A store received a shipment of merchandise for $250.00. The invoice is dated March 15 with terms 3/10, net/30, EOM. • When must payment be made in order to receive the discount? • April 10 • What amount do you owe if you take the discount? • $242.50 • What is the latest date for full payment? • April 30

14. Cash Discounts EXAMPLE • A store received a shipment of merchandise for $2000.00. The invoice is dated September 20, & the terms are 3/10, 30X, net/60. • When must payment be made in order to receive the discount? • October 29 • What amount do you owe if you take the discount? • $1,940.00 • What is the latest date for full payment? • November 20 • Extra dating • The buyer has additional days in which to pay and still receive the cash discount. • 3/10, 60X, net 90 • a 3% discount if the invoice is paid within 10 days plus 60 days from the invoice date, or the full (net) amount is due in 90 days