Chapter Nine Pricing Strategies Visions and Ventures Pricing

Chapter Nine: Pricing Strategies Visions and Ventures

Pricing Strategies Big Ideas for Entrepreneurship � The price you charge can affect whether your venture succeeds or fails. � If you prices are too low, sales may be good but you may not have enough profit to pay your costs. � If sale prices are too high, sales may be slow and you may not have enough profit to pay your costs.

Deciding How Much to Charge � Deciding how much to charge for a product or service is an important part of business. � You want to get the best possible price. � You also want to make a price attractive to customers.

Ways to Set Prices � There are several different approaches to setting a price.

Cost-Plus Pricing � In this pricing model, you add a markup to the cost of each item to determine its price. � The markup is often a percent of the cost per unit. Markup: the difference between what a business pays for an item and the price it charges customers. Percent: a way of expressing an amount out of 100 equal parts; for example, 1% means 1/100 of the amount; 50% means 50/100, or ½; 100% means 100/100 or the full amount. � Did you do this for your venture?

Cost-Plus Pricing � Example: A business marks up prices by 100%. Suppose the business’s cost for a camera is $90 and the price is marked up by 100%. � Then the selling price would be $90 plus 100% of $90. � That would be $90 plus $90, which is $180.

Psychological Pricing � Prices are set to give the impression that they are a good deal for the customer. � Example: Pricing a product at $9. 99 instead of $10. 00 gives the impression that it costs about $9. 00, not about $10. 00.

Follow-the-Competition Pricing � If you choose this type of pricing, you need to know all your costs. � This will help you determine whether you can make a profit at this price. � Example: A new bakery charges the same prices for its products as the grocery store does.

Penetration Pricing � Prices are set below competitors’ prices. � This can attract new customers, but your price needs to be high enough to give you a profit. � Example: A new baby store sells strollers for 10% less than competing stores as a penetration-pricing strategy.

Price Skimming � This type of pricing is possible when a business has no competition. � You can set any price that customers are willing to pay. � � Example: Someone might decide to price a new toy that no one else is selling at $49. 99. Later, competitors start selling similar toys, and your sales slow down. Then you might lower your price to $39. 99.

Loss-Leader Pricing � The prices of some items are very low to attract customers who might buy other items. � Example: Some movie theatres charge a low admission price. They know that they will make their big profits selling popcorn, candy, and drinks.

Choosing a Pricing Strategy These are some of the questions to ask when choosing a pricing strategy: � Who else sells this product or service? � How much do they charge for it? � How much are your customers willing to spend? � How many people want your product or service? � How much do people want your product or service? � How much will it cost to make your product or provide your service? � How much will it cost to get your product or service to your customers? � What would be a good way to convince people to buy your product or service?

Vocabulary: Cost-plus pricing: increasing the cost of an item by a given percent to determine the price. Markup: the difference between what a business pays for an item and the price it charges customers. Percent: a way of expressing an amount out of 100 equal parts; for example, 1% means 1/100 of the amount; 50% means 50/100, or ½; 100% means 100/100 or the full amount. Psychological pricing: using an understanding of how customers think to set prices.

Vocabulary: Follow-the-competition pricing: setting prices to match competitors’ prices. Penetration pricing: setting prices below competitors’ prices to help you penetrate (break into) the market. Price skimming: charging high prices when there is no competition. Loss-leader pricing: setting the price of an item at or less than the cost per unit to attract customers who might buy other items.

Assignment: � Create a Word document titled “Pricing Strategies for Final Venture” � Identify each product you are going to be selling and the pricing strategy you will use for each. � Explain why you think this pricing strategy will help increase your profit margin for each. � Hand in over the network.

End of Chapter Nine: Pricing Strategies