The Economics of Supply and Demand Pricing Strategies

The Economics of Supply and Demand Pricing Strategies Chapter 9 Lesson 2

Opening Act l 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.

l. A well-known name on a product gives consumers more confidence in the quality of the product. l Identify personal characteristics of Donald Trump that can be associated with his line of clothing.

Pricing Considerations l Price - the amount that customers pay for products and services l Pricing - the process of establishing and communicating the value of goods and services to customers l Determining Price n You must take into consideration the cost of merchandise, operating expenses, and the desired amount of profit

Pricing Considerations l Cost of merchandise is what you paid to manufacturers for the products that you sell l Operating Expenses - all the costs associated with running your business n Utilities, salaries, and taxes are examples l Markup n 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 l Pricing is also determined according to the rules of supply and demand l In a monopoly situation the company can sell the product for any price they want l When there is competition the company must set their prices near their competitors

Pricing Policies l One-price policy - all customers pay the same price for a product n Concerts, football games, running shoes l Flexible pricing policy - allows customers to negotiate prices within a range n Cars, furniture, appliances

Pricing Policies l Price Lines - distinct categories of merchandise based upon price, quality, and features n Ralph Lauren’s Polo line is its high-end price line and Chaps is its moderate price-line l Geographic pricing - allows pricing variations based upon geographic locations n Factors that influence this include distribution costs, local competition, and local taxes and/or restrictions

Pricing Strategies l Psychological Pricing l Prestige Pricing l Volume Pricing l Promotions l Quantity Discounts l Trade-In Allowances

Psychological Pricing l Retailers are creating an illusion for customers l Odd-Even pricing n Where prices ending in $. 98 or $. 99 give customers the illusion of spending less than the next higher dollar amount n Customers think that $29. 98 is considerably less expensive than $30. 00

Prestige Pricing l When retailers charge higher-thanaverage prices for merchandise and target customers seeking status and high quality l Athletic specialty stores charge higher prices for their merchandise suggesting superior quality - even if it may not be!

Volume Pricing l Merchandise is frequently discounted by manufacturers if it is purchased in large amounts l Wal-mart pays lower prices for its merchandise due to the large volume that is purchased l The savings is passed onto customers which causes a high volume of sales

Promotions l Used to get customers into the store n l Loss-Leader pricing n l Willingness to take a loss on the reduced prices of selected items in order to create more customer traffic Special Event Promotion n l Examples include two-hour 50% off sale, BOGO, No interest for 12 months Associates a sale with an event such as Thanksgiving Rebates n Coupons on products that customers can mail in for a refund

Quantity Discounts l An item is $2 each but you can get 3 for $5 l Customers receive the financial benefit for buying more l This is the concept behind season passes to theme parks or season tickets to sporting events

Trade-In Allowances l Companies allow you to bring in your old items and get a discount on new items

Intermission l List five pricing strategies to increase sales

Determining The Price l 5 Steps 1. 2. 3. 4. 5. Establish price objectives Determine cost of the product or service Estimate consumer demand Study the competition Decide on a pricing strategy

Encore 1. Which of the following allows consumers to negotiate prices? a. One-price policy b. Flexible pricing policy c. Psychological pricing d. Promotional pricing 2. Which of the following statements regarding markup is true? a. b. c. d. 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 strategy?