Principles of Business, Marketing, and Finance Prices in a Private Enterprise System Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Value and Price Pricing Factors Supply and demand Uniqueness Age Season Complexity convenience The age of a product can either decrease or increase the price. Rare antiques and fine wines go up in price with age while vehicles and equipment decrease in price due to age. Ask students to name other products that would be affected by supply and demand or simple convenience of a product. Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Price Money a customer must pay for a product or service Includes product costs, operating expenses, and a profit Markup-amount added to the cost of a product to set the selling price equal to the expected gross margin Markdown-a reduction from the original selling price The markup for most clothing stores is at least 200%. In a jewelry or furniture store it may be as high as 600 – 800 %. Explain to students why it is worth waiting for the 50% markdown and how stores are still able to maintain a profit. In most grocery stores the NET profit may be as small as 1% profit. Copyright © Texas Education Agency, 2011. All rights reserved

Price as a Marketing Tool When people pay high prices, they expect high quality and excellent service. For some people price is related to quality. An expensive meal must meet the high expectations of the customer. Satisfaction is related to price. Price determines how much money a business will make to cover costs and make a profit. Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Importance of Price Value in the view of the customer Part of the marketing mix Communicates the value of products and services More than the amount the customer must pay for a product or service Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Price Adjustability Prices can be changed quickly Changing a price sticker or marking out an old price Some stores seem to always be having the “sale of the year.” Pricing is one element of the marketing mix that can be adjusted frequently to increase the traffic flow of customers. Copyright © Texas Education Agency, 2011. All rights reserved

Price: An Economic Concept People have unlimited wants and needs People have limited resources Price allocates available resources among people Economic utility-value added through changes in form, time, place or possession We always want more than we can afford. Some products are more desirable than others. Spending money on a vacation is much more attractive than spending money for funeral pre-planning. Spending money for a new automobile is much more fun than spending money on the insurance to protect the automobile. Utility also refers to usability to the consumer. A bolt of cloth is not nearly as valuable to the consumer as the suit that was made from the cloth. Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Elasticity of Demand Based on the number of good substitutes for a product Based on the willingness of consumers to go without a product if the price rises too much Ask students what one product they would definitely give up if the price went too high? What product would they absolutely NEVER give up no matter what they price was? Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Types of Demand Inelastic-a price decrease will decrease total revenue Elastic-a price decrease will increase total revenue Copyright © Texas Education Agency, 2011. All rights reserved

Setting Price Objectives Maximize Profits Increase Sales Maintain an Image Individuals take the risk of operating a business to make a profit. Pricing strategies are sometimes based upon the image that the business desires to maintain. Copyright © Texas Education Agency, 2011. All rights reserved

Determining a Price Range Maximum price Minimum price Breakeven point -amount that must be sold just to cover all costs If students are employed ask them how and when markdowns are determined in their stores? Do the markdowns increase customer traffic to the store? What is the best promotion to advertise the sale prices? Radio, TV, Newspaper, word of mouth? Copyright © Texas Education Agency, 2011. All rights reserved

Information to Calculate Breakeven Point Fixed costs Variable costs Total costs Product price Total revenue Copyright © Texas Education Agency, 2011. All rights reserved

Calculating a Selling Price Product cost Gross margin Operating expenses Net profit Markup Markdown Copyright © Texas Education Agency, 2011. All rights reserved

Pricing Based on Market Conditions Competitive Environment Product Life Cycle Changing competition during business cycles Skimming price-high price designed to emphasize the quality or uniqueness of the product Penetration price-a very low price designed to increase the quantity sold of a product by emphasizing the value When a product is at the end of its life cycle, the price should decrease dramatically. A good example of this concept involves computers that become obsolete or new televisions that replace the previous greatest models. Copyright © Texas Education Agency, 2011. All rights reserved

Consumer Purchase Classifications Staple convenience goods and price-based shopping goods Customers see few product differences Dollar Stores have become increasingly popular because consumers do not feel a need to spend large sums of money on staple convenience goods like toothpaste , toilet paper and shampoo. Copyright © Texas Education Agency, 2011. All rights reserved

Non-Price Competition De-emphasize price Carefully study the needs of a target market Find out things customer find dissatisfying about the competition Develop a better, more satisfying marketing mix Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Pricing Strategies Price Flexibility One-price policy Flexible pricing policy Price Lines Geographic Pricing FOB Pricing Zone pricing Automobile dealerships have price lines for different types of vehicles. The GM dealership has the Buick and Cadillac price lines. Ask students if they know of any retail organizations who own similar stores with different price lines (Gap, Banana Republic, etc). FOB pricing affects the final price of a product. FOB dictates whether the producer or the final consumer pays the cost of shipping the merchandise Copyright © Texas Education Agency, 2011. All rights reserved

Discounts and Allowances Reductions in prices Quantity discount Seasonal discount Cash discount Trade discount Advertising allowance Coupon Rebate Write the vocabulary on the board and have students give an example of each term as you discuss this slide. Copyright © Texas Education Agency, 2011. All rights reserved

Copyright © Texas Education Agency, 2011. All rights reserved Added Value Changing the customer’s perception of value by making additions to the purchase. Copyright © Texas Education Agency, 2011. All rights reserved

Customer Service GAP Assignment A customer service gap is the difference between customers’ expectations of a service and the actual service they receive. Complete the following assignment with a partner. Recall the last time you purchased a service that didn’t meet your expectations? Was the price charged directly related to the quality of service provided? What improvements could the business implement to improve the service? Prepare a PowerPoint presentation to detail: The service purchased Explain the experience you had Give suggestions for improvements Copyright © Texas Education Agency, 2011. All rights reserved