Page 606 - Business Principles and Management

Chapter 22 • Pricing and Promotion

Both of these companies made a gross profit, but they must deduct operating
expenses to arrive at their net profit. If Business A’s operating expenses are much
greater than Business B’s, then Business B might make the greater net profit, even
though its gross profit was lower.
Businesses must be careful about setting extremely high or extremely low
prices. With extremely high prices, the business may not sell a sufficient quantity
to yield a net profit. With extremely low prices, the business may not be able to
cover its costs no matter how many products it sells. Between these two extremes
is a reasonable price that satisfies customers and allows a reasonable profit. Next
you will learn about some of the strategies marketing managers use to set a rea-
sonable price.

PRICING TO MEET COMPETITION

The amount of competition among companies handling similar products or ser-
vices is an important factor in establishing prices. If one company has much
higher prices than its competitors for the same products, some of the company’s
customers are likely to buy from the competitors. Even similar businesses in
separate locations may compete for the same customers. If prices are too high in
one area, many people will travel elsewhere to purchase goods or services. For
example, if a service station in one neighborhood is selling a certain brand of
gasoline for $2.39 a gallon and a station 2 miles away is selling the same brand
for $1.99, customers may be willing to travel to buy where the price is lower.
The Internet has had a major impact on pricing, because it makes price
comparison easy for customers. Some Web sites search for the lowest prices for
specific products. Customers who value low prices over service may buy from
the lowest-priced competitor.
A business may need to offer some of its merchandise at a price that does not
allow a profit because a competitor has established an even lower price. However,
it is not always necessary to have a lower selling price than competitors. If a
company has a loyal group of customers and offers a product with some distinct
advantages, or provides services that customers want and other companies do Why has the Internet had a
not offer, the company may be able to charge a higher major effect on pricing?
price without losing customers. Remember that the
cost of providing higher-quality products or more ser-
vices may be expensive, so profits may not be higher
just because prices are higher. Windzors, the exclusive
sporting goods store in the chapter-opening case, was
relying on unique products, exclusive services, and an
interesting shopping experience to justify much higher
product prices.
When competition is intense, some companies may
have to set some of their prices at or below the actual
costs of doing business. In such a competitive situation,
only the most efficient businesses make a net profit.
Even when competition is not strong, if a company sets
its prices too high, people will try to do without its
products or find substitutes rather than pay prices that
seem to give that company an unduly large profit.

PRICING TO EARN A SPECIFIC PROFIT PHOTO: © GETTY IMAGES/PHOTODISC.

When introducing a new product, many businesses
base their selling price on a specific profit they want
to make. The business first determines the costs of

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