Entrepreneurship CHAPTER 11 SECTION 1

 To stay in business, you must make a profit.  Costs and expenses can be fixed or variable: 1.Fixed costs – do not vary with the number of units sold (ex. rent, utilities, and insurance premiums) 2.Variable costs – change depending on the number of units sold (ex. sales commissions, and delivery expenses)

 Supply and demand 1.When demand is high and supply is low, prices will be high. 2.When demand is low and supply is high, prices will be low. 3.When customers buy a product regardless of price the demand is inelastic. (ex. milk and gas) 4.When demand is sensitive to price then the demand is elastic. (ex. luxury items)

 Consumer perceptions 1.The price of your products helps create your image. 2.Prices set too low, image of poor quality. 3.Prices set too high, may turn customers away.  Competition also affects price. What is your competition selling the product for and why the difference in price with your product.

 Government regulations 1.Your price strategy may be affected by federal and state laws. 2.Price gouging – pricing above the market when no alternate retailer is available. 3.Price fixing – competing companies agree to restrict prices within a specified range.

4. Resale price maintenance – price fixing imposed by a manufacturer on resellers of its products to deter price-based competition. 5. Unit pricing – required pricing of goods on the basis of cost per unit of measure.  Technological trends 1.Technology trends affect price strategy. 2.Adapting with technology can give you a competitive advantage. Not adapting can make the business become obsolete.

 Pricing objectives 1.You must decide what you want to accomplish through pricing. 2.Return on investment (ROI) – amount earned as a result of that investment. $20,000 x.20 = $ Market share – portion of total sales generated by all competing companies in a given market.

 Setting a basic price 1.You can use cost-based, demand-based, or competition-based pricing strategies. 2.Cost-based pricing Must consider your business costs and your profit objectives. The amount added to your cost to cover expenses and ensure a profit is called your mark-up.

3. Demand-based pricing Requires you to find out what customers are willing to pay for your product. 4. Competition-based pricing You need to find out what your competitors charge. Then decide to price below, in line with, or above.

 There are two types of pricing policies: 1.Flexible price policy – allows customers to bargain for price. 2.One-price policy – all customers are charged the same price. Strongly recommended for service businesses.

 Product life cycle 1.Introduction – sales volume is low, market costs are high, profits are low or even negative. a)Price skimming – charge high price to recover costs and maximize profits, price is dropped when product is no longer unique b)Penetration pricing – low initial price to keep unit costs to customers as low as possible

2. Growth – sales climb rapidly, unit costs are decreasing, product begins to show a profit, and competitors come into the market. 3. Maturity – sales begin to slow and profits peak, but profits fall off as competition increases. Principal goal is to stretch the life cycle of the product. 4. Decline – sales and profits continue to fall. Businesses should cut prices to generate sales or clear inventory. Once a product is no longer profitable, it should be phased out.

 Psychological pricing – refers to the belief that customers’ perceptions of a product are strongly influenced by price.  Prestige pricing – higher than average prices are used to suggest status and prestige.  Odd/even pricing – odd prices suggest bargains and even prices suggest higher quality.

 Price lining – items in a certain category are priced the same.  Promotional pricing - lower prices are offered for a limited time to stimulate sales.  Multiple-unit pricing – items are priced in multiples (ex. 3 for 99 cents)

 Bundle pricing – several complimentary products are sold at a single price.  Discount pricing – offers customers reductions in the regular price.  Cash discounts – given for prompt payment (ex. 2/10, n/30)

 Quantity discounts – the more you buy the cheaper per unit.  Trade discounts – given to distribution channel members.  Promotional discounts – used when manufacturers want to pay wholesalers and retailers for carrying out promotional activities.  Seasonal discounts – used with products that have high seasonal demand.