RETAILING. April 23, 2018

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1 RETAILING April 23, 2018

2 TODAY S AGENDA Continue on with Unit 6: Pricing New Lesson: Pricing Policies Unit 6 Quiz - Friday

3 PRICING POLICIES Retail pricing is influenced by both controllable and uncontrollable variables. Controllable variables are those that the retailer can influence, such as: Company goals Expenses Product life cycle Uncontrollable variables are those that the retailer cannot control, such as competition, the economy and fluctuations in supply and demand. A retailer must consider all of these factors when determining how to price their products.

4 COMPANY GOALS

5 COMPANY GOALS Retailers establish prices that will help meet company goals. Company image is one factor that influences how products are priced. Are they a lowpriced store or are they a higher-end store? Whatever their store goals are for their image, this will influence how they price products. Setting prices according to the projected company image can affect the success of the business. If a low-price store sets high prices, customers will not buy and the business will not reach their sales goals.

6 OPERATING EXPENSES

7 OPERATING EXPENSES Products must be priced to cover the operating expenses of a business, as well as the cost of the product. Operating expenses are ongoing expenses that keep a business functioning. Retailers only make a profit after expenses have been paid.

8 OPERATING EXPENSES There are two basic types of expenses: Fixed and Variable. Fixed expenses do not change and are not affected by the number of products sold. For example rent and insurance cost the same amount every month. Variable expenses change based on the activities of the business. For example, the cost of paying for advertising or office supplies may vary from month to month.

9 OPERATING EXPENSES FIXED EXPENSES Equipment Insurance Loan payments Mortgage Rent Salaries paid to employees Cellphone/Internet/TV VARIABLE EXPENSES Advertising Credit card payments Hourly wages paid to employees Office supplies Utilities Hydro/Water Shipping and handling In order to make a profit, a retailer must make enough money to cover both fixed and variable expenses, as well as the cost of goods.

10 OPERATING EXPENSES Cost of Goods Sold (COGS) Cost of goods sold (COGS) is an accounting term which refers to the costs attributed to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. Or, how much it cost the retailer to purchase the product from the vendor.

11 PRODUCT LIFE CYCLE

12 PRODUCT LIFE CYCLE The price of a product can vary depending on the product life cycle stage. If new products in the market are priced high, it is because some people will pay the higher price for the new item. This type of customer is called an early adopter, who is a person who wants to be the first to own the newest products and is willing to pay more to do so.

13 PRODUCT LIFE CYCLE When new products are priced very low, it may be because the retailer doesn t know if the public will accept or want the new product. As the demand for a product grows, the price typically levels off. In other words, products that were initially priced high begin to decrease and products that were initially priced low begin to increase.

14 MAXIMIZING PROFIT

15 MAXIMIZING PROFIT The main pricing objective is to maximize sales and profit. The amount of profit a business makes before subtracting operating expenses is known as gross profit. Maximizing gross profit involves generating as much revenue as possible in relation to total cost of each item. Revenue: $150,000 - Cost of Goods Sold: $50,000 Gross Profit: $100,000 Gross Profit: $100,000 - Fixed Expenses: 8,000 Variable Expenses: 4,000 Net Profit: $88,000 To accomplish this, retailers charge the highest price per unit that customers will pay.

16 MAXIMIZING PROFIT The Return of Break-Even Point In order to make a profit, prices must be high enough to cover the costs of the business. If products are priced too high, customers will not buy. If products are priced too low, the retailer will lose money. A product starts generation a profit after the break-even point. The break-even point is when the revenue from sales equals the costs. There is no profit and no loss. Any revenue earned after this point is profit.

17 MAXIMIZING PROFIT The formula for break-even point is as follows: Fixed costs Selling price Variable costs = Break-even Point

18 MAXIMIZING PROFIT For example, a retailer sells tennis racquets. The total fixed cost for the company to sell racquets is $4,000 for the month (rent, insurance, etc.) Each racquet that the retailer purchases from the vendor costs $20. This means that the variable cost is $20 per racquet. The selling price for the racquets is set at $100 each. 4,000 (Fixed costs) 100 (Selling price) 20 (Variable costs) = 50 Units (Break-even Point) 50 racquets must be sold in order for the retailer to break even. If more than 50 racquets are sold, the retailer will make a profit.

19 WORKSHEET

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