Chapter_03 - Chapter 3 Price and Pricing Strategies...

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Copyright Atomic Dog Publishing, 2006 Chapter 3 Price and Pricing Strategies
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Copyright Atomic Dog Publishing, 2006 3-1 Introduction The basic business process that underlies all ventures, regardless of their industry or size, is: R – C = P (revenue minus cost equals profit). Understanding the business process is critical for entrepreneurs and for people who practice the skills of entrepreneurism. One of the last considerations that the entrepreneur takes into account is the price that will be charged to customers. Yet, setting price for products and services is a critical factor in the success of a venture.
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Copyright Atomic Dog Publishing, 2006 3-1 Introduction (cont.) “Right price” is one that is neither too high nor too low. One of the most straightforward business truths, yet one of the more difficult for the new entrepreneur to understand, is the marketplace sets price. Competitor pricing strategy is an overriding consideration in setting price. “Cost-plus pricing”: New entrepreneurs often set the price of their products or services by adding up all the costs involved in bringing the product or service to market and then adding a specific amount for profit.
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Copyright Atomic Dog Publishing, 2006 3-1 Introduction (cont.) Problem with cost-plus pricing: Customers care about the price they have to pay for products and services and the value they receive for that price. If the entrepreneur uses the cost-plus pricing approach: - The price is set too high and the customer does not buy. - The price is set too low and each sale returns less profit to the business than is possible.
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Copyright Atomic Dog Publishing, 2006 3-2 Pricing Strategy New business owners often have several common misconceptions about the reasons for setting a price. One misconception is that the goal of pricing a product or service should be to increase sales volume. - Many entrepreneurs use pricing strategy as a means of increasing sales volume. - This strategy is understandable because a price change in the market often has an immediate effect on sales volume. The effect of price on volume is well illustrated by basic economics. - One of the most fundamental equations in economics is the supply-demand-price equation. - This equation assumes a free marketplace with willing buyers and willing sellers.
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Copyright Atomic Dog Publishing, 2006 Exhibit 3-1 Supply and Demand Effects on Price
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Copyright Atomic Dog Publishing, 2006 3-2 Pricing Strategy (cont.) Under these conditions, the formula has four implications regarding price: - If supply is held static and demand increases, prices will rise. - If supply is static and demand falls, prices will fall. -
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Chapter_03 - Chapter 3 Price and Pricing Strategies...

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