9.00 Explain pricing strategies for making effective pricing decisions.

9.03 Calculate the selling price of merchandise and services.

D. MARKETING A

SMALL BUSINESS

Profit

Revenue remaining after the expenses of running the business have been deducted.

Factors that affect profit:– demand -- business expenses– prices -- the economy– chance

Ways to increase profit– increase worker efficiency -- increase sales– reduce business expenses

Cost of Merchandise Sold

The amount paid by a business for products purchased for resale or for use in the production of other goods.

The first expense that must be paid.

Is deducted directly from sales revenue to determine gross profit.

Formula (used on the income statement):

Sales Revenue

- Cost of merchandise sold

Gross profit

- Business Expenses

Net profit

Basic Pricing Calculations

Retail Price = Cost + Markup

RP = C + MU 13.50 = 10 + 3.50 An item costs the business $10 and has a markup

of $3.50. What is the retail price?Variations of the equation

C = RP – MU or MU = RP – C The retail price of an item is $30.00 and the markup is $10.00. What is

the cost of the item? 20 = 30 -10

Keystone Pricing

– A common pricing method used by retailers.

– Retail price is calculated by doubling the cost of the merchandise.

cost = $25.00KMU = $25.00retail price = $50.00

Markdowns

The most common type of price change

Used as a tool to stimulate sales, dispose of slow moving products, meet competitor’s prices, and/or increase customer traffic

Markdowns are expressed as a % of net sales. MD% cannot be calculated until goods are sold because they are

based on net sales. Original selling price X MD % = MD, OSP– MD = Final Selling price

The original selling price of an item is $100.00 and the markdown is 30%. What is the markdown and final sales price of the item?

100 x .3 = $30 (MD) 100 – 30 = $70 (FSP)

Reasons for Markdowns

Buying errorsPricing errorsSpecial salesBroken assortments

Quantity Discounts

Reductions in price given by manufacturers/wholesalers when a large or specified quantity is purchased.– Cumulative quantity discounts: Based on

total purchases over a specified period of time (whole purchase).

– Non-cumulative quantity discounts: Given for a one-time purchase or shipment (on specific product like envelopes).

Trade Discounts

Also called functional discounts

Offered to channel members for performing certain functions like storing or record keeping

Can be stated as a percentage off the list price or as a series of percentages off the list price. Example: “List price less 45%” or “List price less 30%, less 15%, less 5% ($2000 less 30/12/5)”

2000 x .3 = 600 x .12 = 72 x .05 = 3.60

Cash Discounts

Offered to buyers as an incentive for paying the invoice quickly.

Cash Discounts

Ordinary dating– based on the date

of the invoice– 2/10, net/30

buyer receives a 2% discount if the invoice is paid within 10 days, or the full (net) amount is due in 30 days

Advanced dating– indicates that the

payout period does not begin until the date indicated in the terms

– 5/10, net/30, June 15 buyer receives a 5%

discount if the invoice is paid within 10 days of June 15, or the full amount is due 30 days from June 15

Cash Discounts

EXAMPLE

A retailer received a shipment of goods on January 5 for $700.00. The invoice is dated December 9 and the terms are 2/10, net/30, ROG.

When must payment be made in order to receive the discount?

January 15 What amount do you owe if you

take the discount? 686 What is the latest date for full

payment? February 4

Receipt-of-Goods dating– The payout period does

not begin until the buyer receives the goods from the seller.

– 2/10, net/30, ROG 2% discount if the invoice

is paid within 10 days of receiving the goods, or the full (net) amount is due 30 days from when the goods are received

Cash Discounts

End-of-month dating– The payout period does – not begin until the last – day of the month in which the

invoice is dated.– 2/10, net/30, EOM

2% discount if the invoice is paid within 10 days of the last day of the month of the invoice, or the full (net) amount is due 30 days from the last day of the month

EXAMPLE

A store received a shipment of merchandise for $250.00. The invoice is dated March 15 with terms 3/10, net/30, EOM.

When must payment be made in order to receive the discount?

April 10 What amount do you owe if you take the

discount? $242.50 What is the latest date for full payment? April 30

Cash Discounts

Extra dating– The buyer has

additional days in which to pay and still receive the cash discount.

– 3/10, 60X, net 90 a 3% discount if the

invoice is paid within 10 days plus 60 days from the invoice date, or the full (net) amount is due in 90 days

EXAMPLE

A store received a shipment of merchandise for $2000.00. The invoice is dated September 20, & the terms are 3/10, 30X, net/60.

When must payment be made in order to receive the discount?

October 29

What amount do you owe if you take the discount?

$1,940.00

What is the latest date for full payment?

November 20