Lesson 1: Pricing

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

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.

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?

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

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

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

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

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

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

9. Key Math Concepts 1.Price = Cost + Desired Profit 2.Margin = Price – Cost 3.Markup Amount = Cost x Markup Percentage 4.Markup Price = Cost + Markup Amount 5.Markdown Amount = Price x Percentage 6.Markdown Price = Current Price – Markdown Amount

10. Examples 1.Calculate the price of an item that has a cost to the business of $3.50 and a desired profit of $ Calculate the margin of an item with a price of $9.00 and a cost of $ Calculate the new price of an item that costs $7.50 and receives a markup of 40%. 4.Calculate the new price of an item that sells for $12.00 and will get a markdown of 30%.

Answers 1.$ $1.00 = $ $ $4.50 = $ $7.50 x.40 = $3.00 $ $3.00 = $ $12.00 x.30 = $3.60 $ $3.60 = $8.40