The Economics of Supply and Demand

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Transcript The Economics of Supply and Demand

The Economics of Supply and
Pricing Strategies
Chapter 9 Lesson 2
Opening Act
The Donald Trump line of business
clothing demands a high price. Mr.
Trump earns 10% royalties for all sales
of his business clothing. What motivates
consumers to purchase expensive
business attire? Many businesspersons
will associate the Donald Trump name
with prestige and success. Brand
awareness is enhanced with a celebrity
A well-known name on a product gives
consumers more confidence in the
quality of the product.
Identify personal characteristics of
Donald Trump that can be associated
with his line of clothing.
Pricing Considerations
Price - the amount that customers pay
for products and services
 Pricing - the process of establishing and
communicating the value of goods and
services to customers
 Determining Price
 You
must take into consideration the cost
of merchandise, operating expenses, and
the desired amount of profit
Pricing Considerations
Cost of merchandise is what you paid to
manufacturers for the products that you sell
 Operating Expenses - all the costs
associated with running your business
 Utilities,
salaries, and taxes are examples
 The
amount that is added to the cost of an item
for sale to cover operating expenses and allow
for a profit
Supply and Demand
Pricing is also determined according to
the rules of supply and demand
 In a monopoly situation the company
can sell the product for any price they
 When there is competition the company
must set their prices near their
Pricing Policies
One-price policy - all customers pay the
same price for a product
 Concerts,
football games, running shoes
Flexible pricing policy - allows
customers to negotiate prices within a
 Cars,
furniture, appliances
Pricing Policies
Price Lines - distinct categories of
merchandise based upon price, quality, and
 Ralph
Lauren’s Polo line is its high-end price line
and Chaps is its moderate price-line
Geographic pricing - allows pricing variations
based upon geographic locations
 Factors
that influence this include distribution
costs, local competition, and local taxes and/or
Pricing Strategies
Psychological Pricing
 Prestige Pricing
 Volume Pricing
 Promotions
 Quantity Discounts
 Trade-In Allowances
Psychological Pricing
Retailers are creating an illusion for
 Odd-Even pricing
 Where
prices ending in $.98 or $.99 give
customers the illusion of spending less
than the next higher dollar amount
 Customers think that $29.98 is
considerably less expensive than $30.00
Prestige Pricing
When retailers charge higher-thanaverage prices for merchandise and
target customers seeking status and
high quality
 Athletic specialty stores charge higher
prices for their merchandise suggesting
superior quality - even if it may not be!
Volume Pricing
Merchandise is frequently discounted by
manufacturers if it is purchased in large
 Wal-mart pays lower prices for its
merchandise due to the large volume
that is purchased
 The savings is passed onto customers
which causes a high volume of sales
Used to get customers into the store
Loss-Leader pricing
Willingness to take a loss on the reduced prices of
selected items in order to create more customer traffic
Special Event Promotion
Examples include two-hour 50% off sale, BOGO, No
interest for 12 months
Associates a sale with an event such as Thanksgiving
Coupons on products that customers can mail in for a
Quantity Discounts
An item is $2 each but you can get 3 for
 Customers receive the financial benefit
for buying more
 This is the concept behind season
passes to theme parks or season tickets
to sporting events
Trade-In Allowances
Companies allow you to bring in your
old items and get a discount on new
List five pricing strategies to increase
Determining The Price
5 Steps
Establish price objectives
Determine cost of the product or service
Estimate consumer demand
Study the competition
Decide on a pricing strategy
Which of the following allows consumers to
negotiate prices?
a. One-price policy
b. Flexible pricing policy
c. Psychological pricing
d. Promotional pricing
Which of the following statements regarding markup
is true?
Markup is the amount of profit you want to make
Markup is not affected by operating expenses
Markup must be sufficient to cover operating expenses
and allow for a profit
None of the above
3. The owner of a sporting goods store
has decided upon a 50% markup on all
apparel. How much will the store charge
for bicycle shorts it purchased from the
wholesaler for $10 each? What did the
store pay for running shoes that are
selling for $75.
4. Why do so many price tags end in .98
or .99? What is this pricing strategy
called? How effective is this pricing