1. Calculating Prices 5.02

2. 1. Bait-and-switch advertising: Promoting a low-priced item to attract customers to whom the business then tries to sell a higher priced item 2. Business cycles: Periods of expansion and contraction in economic activities 3. Capital: Assets of a business 4. Cash flow: The movement of funds into and out of a business; determines the amount of cash the business has to work with at any given time 5. Costs: The expenses involved with manufacturing, promoting, and distributing a product 6. Elastic demand: A form of demand for products in which changes in price correspond to changes in demand 7. Fixed costs: Business costs that are not affected by changes in sales volume 8. Growth stage: The product life cycle stage in which sales rise rapidly 9. Inelastic demand: A form of demand in which changes in price do not affect demand 10. Introductory stage: The product life cycle stage when the product first appears in the marketplace

3. 11. Law of supply and demand: Economic principle which states that the supply of a good or service will increase when demand is great and decrease when demand is low 12. Market price: Actual price that prevails in a market at any particular moment 13. Market share: An organization’s portion of the total industry sales in a specific market 14. Mark-up: The difference between the cost of a product and its selling price 15. Maturity stage: The product life cycle stage in which sales peak and then increase at a slower rate or start to decline 16. Monopolistic competition: A type of market structure in which a lot of businesses sell similar products that have only a few differences 17. Obsolescence: The state of being outmoded or unfashionable 18. Oligopoly: A market structure in which there are relatively few sellers, and industry leaders usually determine prices 19. Operating expenses: All of the expenses involved in running a business 20. Price discrimination: An illegal activity in which a business charges different customers different prices for similar amounts and types of products

4. Steps in Setting Price  Determine pricing objectives: What is your purpose in setting a price?  Study costs: Price planning must include an examination of business costs.  Estimate demand: How many products can you sell in a given time period?

5. Steps in Setting Price  Study the competition: How will you respond to competitor’s prices?  Decide on a pricing strategy: Select the strategy with the greatest potential for profit.  Set your price: Monitor sales, customer reactions, and company goals to plan for needed changes.

6. Specific Pricing Techniques  Fixed pricing (One-Price Policy): Charging the same prices to all customers regardless of the quantity of the purchase.  Promotional pricing: Selling a product at a temporarily lower price to attract customers. Loss leaders: Selling a product below cost in an effort to increase customer traffic. Special event pricing: Sales events designed to attract customers and encourage them to buy. Example: Back- to-School Sale

7. Specific Pricing Techniques  Variable pricing (Flexible-Price Policy): Encourages customers to bargain with sellers in an effort to obtain the best price.  Price lining: Establishing price points between products in a product line; used to communicate differences in quality and/or service to consumers.  Unit pricing: Stating the price of a product per unit of standard measure. Required by some states to do this

8. Specific Pricing Techniques  Psychological pricing: Used by organizations that believe that customers base their perceptions of products on price and that these perceptions affect customer buying decisions. Odd/even cent pricing: Prices ending in odd numbers communicate a bargain. Prices ending in even numbers communicate quality. Prestige pricing: Customers equate high price with high quality. This technique sets a higher-than average price for products to communicate quality and status.

9. Specific Pricing Techniques  Pricing for new products: Price planning is a vital step in ensuring product success for new products. Skimming pricing: Setting a high price to capitalize on demand when introducing a product that has little competition and will appeal to customers who like to be the first to have the latest products. Penetration pricing: Setting a low price to motivate customers to purchase when introducing a product into a competitive market and attempting to gain customer trial.

10. Calculating Prices

11. Markup  Businesses (retail or wholesale) markup their products/services to make a profit  Retailers and wholesalers use the same formula to determine the selling price  Formula: C + OE + P = SP ( Cost + Operating Expenses + Profit (mark-up) = Selling Price) Example: If the cost of a sweater is $20 and the operating expenses are $5 and they want to make a $15 profit then the selling price is $40 ($20 + $5 + $15 = $40)

12. Markdowns  Markdown A reduction from the original selling price. Example= 25 % off of $50= 37.50 $50*25% = $12.50, $50 - $12.50 = $37.50  Reasons for markdowns: Buying errors: wrong styles, color, sizes, materials or quantities Pricing errors: initial price may be set too high Special sales: stock marked down for special sales events

13. Discounts  Discounts are price adjustments often taken by employees for purchases or offered by vendors (suppliers) to their customers to encourage prompt payment or to get rid of seasonal items  Formula: Selling Price x Discount = New Discounted Price

14. Break-Even Point -The point at which the gain from an economic activity equals the costs and expenses incurred in pursuing it -Some companies just want to be able to “break-even” when starting a new business -It is reached when sales equal the costs and expenses of making or distributing a product -BEP formula= Total Fixed Expenses Selling Price – Variable Expenses -Example: With fixed costs of $9,000and variable cost of $7 per unit will sell at a price of $15 per unit. Compute the break- even point: $9,000 (total fixed costs) $15 (selling price) - $7 (variable costs) = 1,125 units To convert to dollars-1,125 units X $15 (SP) = $16,875