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Entrepreneurship CHAPTER 11 SECTION 1
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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)
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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)
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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.
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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.
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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.
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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 = $4000 3.Market share – portion of total sales generated by all competing companies in a given market.
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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.
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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.
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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.
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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
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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.
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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.
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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)
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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)
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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.
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