Unit B Planning and Preparing to Manage a Small Business Competency 5.00 Understand pricing, promotion, and market planning.

Pricing 5.01 Develop foundational knowledge of pricing 5.02 Employ pricing strategies to determine optimal prices.

Basic Tenants of Pricing  Businesses should set their selling prices at a level that will cover expected markdowns and expenses.  Entrepreneurs should keep track of what others are charging to remain competitive.  Most businesses are flexible: lower prices during hard economic times.  Business owners set ceiling prices based on consumer perception and demand.

Factors to consider when setting price  Look at your target market – how do they judge the value of your product?  Sales-oriented pricing objectives are meant to increase total sales.  Some companies set selling prices low to get market share as fast as possible.  The cost of raw materials helps determine the selling price.

Pricing in The Product Life Cycle Price skimming = start with high price Penetration pricing = start with low price

Introduction  One of two methods is used when introducing a product. Price skimming = start high Price penetration = start low

Growth  Sales increase  Unit costs decrease  Adjust prices based on how you started.  Promotion costs increase.

Maturity  Try to stabilize product price.  Look for new markets.  Make product improvements.

Decline  Cut prices to stimulate sales or  To clear inventory.

Calculating Prices  Break-even point = money from product sales equals the costs of making and distributing the product.  How many units will you have to sell?  How much money will you have to make?

Break-Even (unit sales price)

Example: Calculating how many units need to be sold  A business has total fixed costs of $875,000.  Unit selling price (UPS) = $1200.  Variable cost per unit = $700. $1200 – $700 = $500 $875,000 $500 = 1750 Units

Example: Calculating how many dollars it will take to break even  A business has total fixed costs of $875,000.  Unit selling price (UPS) = $1200.  Variable cost per unit = $700. $1200 – $700 = $500 $875,000 $500 = 1750 Units 1750 X $1200 = $2,100,000

Discounts  Any amount subtracted from the list price. Price X discount percentage = discounted dollars. Price – discounted dollars = discounted price.