Entrepreneurship
CHAPTER 11 SECTION 1
To stay in business, you must make a profit.
Costs and expenses can be fixed or variable:
1. Fixed costs – do not vary with the number of units
sold (ex. rent, utilities, and insurance premiums)
2. Variable costs – change depending on the number of
units sold (ex. sales commissions, and delivery
expenses)
Supply and demand
1. When demand is high and supply is low, prices will be
high.
2. When demand is low and supply is high, prices will be low.
3. When customers buy a product regardless of price the
demand is inelastic. (ex. milk and gas)
4. When demand is sensitive to price then the demand is
elastic. (ex. luxury items)
Consumer perceptions
1. The price of your products helps create your image.
2. Prices set too low, image of poor quality.
3. Prices set too high, may turn customers away.
 Competition also affects price.
•What is your competition selling the product for and
why the difference in price with your product.
Government regulations
1. Your price strategy may be affected by federal and
state laws.
2. Price gouging – pricing above the market when no
alternate retailer is available.
3. Price fixing – competing companies agree to restrict
prices within a specified range.
4. Resale price maintenance – price fixing imposed by a
manufacturer on resellers of its products to deter price-based
competition.
5. Unit pricing – required pricing of goods on the basis of cost
per unit of measure.
 Technological trends
1. Technology trends affect price strategy.
2. Adapting with technology can give you a competitive
advantage. Not adapting can make the business become
obsolete.
Pricing objectives
1. You must decide what you want to accomplish
through pricing.
2. Return on investment (ROI) – amount earned as a
result of that investment. $20,000 x .20 = $4000
3. Market share – portion of total sales generated by all
competing companies in a given market.
Setting a basic price
1. You can use cost-based, demand-based, or
competition-based pricing strategies.
2. Cost-based pricing
• Must consider your business costs and your profit objectives.
• The amount added to your cost to cover expenses and
ensure a profit is called your mark-up.
3. Demand-based pricing
• Requires you to find out what customers are willing to pay
for your product.
4. Competition-based pricing
• You need to find out what your competitors charge.
• Then decide to price below, in line with, or above.
There are two types of pricing policies:
1. Flexible price policy – allows customers to bargain for
price.
2. One-price policy – all customers are charged the same
price.
• Strongly recommended for service businesses.
Product life cycle
1. Introduction – sales volume is low, market costs are high,
profits are low or even negative.
a) Price skimming – charge high price to recover costs and
maximize profits, price is dropped when product is no
longer unique
b) Penetration pricing – low initial price to keep unit costs to
customers as low as possible
2. Growth – sales climb rapidly, unit costs are decreasing,
product begins to show a profit, and competitors come into
the market.
3. Maturity – sales begin to slow and profits peak, but profits
fall off as competition increases.
• Principal goal is to stretch the life cycle of the product.
4. Decline – sales and profits continue to fall.
• Businesses should cut prices to generate sales or clear inventory.
• Once a product is no longer profitable, it should be phased out.
Psychological pricing – refers to the belief that
customers’ perceptions of a product are strongly
influenced by price.
Prestige pricing – higher than average prices are
used to suggest status and prestige.
Odd/even pricing – odd prices suggest bargains and
even prices suggest higher quality.
Price lining – items in a certain category are priced
the same.
Promotional pricing - lower prices are offered for a
limited time to stimulate sales.
Multiple-unit pricing – items are priced in multiples
(ex. 3 for 99 cents)
Bundle pricing – several complimentary products
are sold at a single price.
Discount pricing – offers customers reductions in
the regular price.
Cash discounts – given for prompt payment (ex.
2/10, n/30)
Quantity discounts – the more you buy the cheaper per
unit.
Trade discounts – given to distribution channel
members.
Promotional discounts – used when manufacturers want
to pay wholesalers and retailers for carrying out
promotional activities.
Seasonal discounts – used with products that have high
seasonal demand.