The Economics of Supply and Demand

The Economics of Supply and Demand

Pricing StrategiesChapter 9 Lesson 2Pricing Strategies

Chapter 9 Lesson 2

Opening ActOpening 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 name.

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 name.

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.

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 ConsiderationsPricing 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

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 ConsiderationsPricing 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

Markup The amount that is added to the cost of an item

for sale to cover operating expenses and allow for a profit

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

Markup The amount that is added to the cost of an item

for sale to cover operating expenses and allow for a profit

Supply and DemandSupply 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 want

When there is competition the company must set their prices near their competitors

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 want

When there is competition the company must set their prices near their competitors

Pricing PoliciesPricing 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 range Cars, furniture, appliances

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 range Cars, furniture, appliances

Pricing PoliciesPricing Policies

Price Lines - distinct categories of merchandise based upon price, quality, and features Ralph Lauren’s Polo line is its high-end price line

and Chaps is its moderate price-lineGeographic pricing - allows pricing variations

based upon geographic locations Factors that influence this include distribution

costs, local competition, and local taxes and/or restrictions

Price Lines - distinct categories of merchandise based upon price, quality, and features Ralph Lauren’s Polo line is its high-end price line

and Chaps is its moderate price-lineGeographic pricing - allows pricing variations

based upon geographic locations Factors that influence this include distribution

costs, local competition, and local taxes and/or restrictions

Pricing StrategiesPricing Strategies

Psychological PricingPrestige PricingVolume PricingPromotionsQuantity DiscountsTrade-In Allowances

Psychological PricingPrestige PricingVolume PricingPromotionsQuantity DiscountsTrade-In Allowances

Psychological PricingPsychological Pricing

Retailers are creating an illusion for customers

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

Retailers are creating an illusion for customers

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 PricingPrestige Pricing

When retailers charge higher-than-average 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!

When retailers charge higher-than-average 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 PricingVolume Pricing

Merchandise is frequently discounted by manufacturers if it is purchased in large amounts

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

Merchandise is frequently discounted by manufacturers if it is purchased in large amounts

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

PromotionsPromotions

Used to get customers into the store Examples include two-hour 50% off sale, BOGO, No

interest for 12 months 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 Associates a sale with an event such as Thanksgiving

Rebates Coupons on products that customers can mail in for a

refund

Used to get customers into the store Examples include two-hour 50% off sale, BOGO, No

interest for 12 months 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 Associates a sale with an event such as Thanksgiving

Rebates Coupons on products that customers can mail in for a

refund

Quantity DiscountsQuantity Discounts

An item is $2 each but you can get 3 for $5

Customers receive the financial benefit for buying more

This is the concept behind season passes to theme parks or season tickets to sporting events

An item is $2 each but you can get 3 for $5

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 AllowancesTrade-In Allowances

Companies allow you to bring in your old items and get a discount on new items

Companies allow you to bring in your old items and get a discount on new items

IntermissionIntermission

List five pricing strategies to increase sales

List five pricing strategies to increase sales

Determining The PriceDetermining The Price

5 Steps1. Establish price objectives2. Determine cost of the product or service3. Estimate consumer demand4. Study the competition5. Decide on a pricing strategy

5 Steps1. Establish price objectives2. Determine cost of the product or service3. Estimate consumer demand4. Study the competition5. Decide on a pricing strategy

EncoreEncore

1. Which of the following allows consumers to negotiate prices?

a. One-price policyb. Flexible pricing policyc. Psychological pricingd. Promotional pricing

2. Which of the following statements regarding markup is true?

a. Markup is the amount of profit you want to makeb. Markup is not affected by operating expensesc. Markup must be sufficient to cover operating expenses

and allow for a profitd. None of the above

1. Which of the following allows consumers to negotiate prices?

a. One-price policyb. Flexible pricing policyc. Psychological pricingd. Promotional pricing

2. Which of the following statements regarding markup is true?

a. Markup is the amount of profit you want to makeb. Markup is not affected by operating expensesc. Markup must be sufficient to cover operating expenses

and allow for a profitd. 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 strategy?

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 strategy?