Page 608 - Business Principles and Management

Chapter 22 • Pricing and Promotion

business’s customers expect a high level of service, or if the business is using the
extra service to appear different from competitors, it will have to set prices
higher to achieve a profit.

CHECKPOINT
List five different pricing strategies that businesses use.

Controlling Costs

Businesses are not always able to increase prices just because they are not making a
profit. The costs of merchandise and operating expenses often increase, but prices
charged to customers cannot be raised due to competition. Businesses have to make
careful purchasing and operating decisions to avoid unnecessary expenses. Three
important areas that can affect costs are (1) markdowns, (2) damaged or stolen
merchandise, and (3) merchandise returns.

MARKDOWNS
In many cases, businesses are forced to sell some products at lower prices than they
had planned. This can happen because they purchase products that customers do
not want or that go out of style. Businesses must also sell products at lower prices
when they overestimated demand and bought too many products, when competi-
tion increases, or when competitors lower prices.
Businesses cannot always avoid markdowns, but they can usually control them.
Careful purchasing can eliminate many markdowns. Proper product handling and
marketing practices can also reduce the number of markdowns.

DAMAGED OR STOLEN MERCHANDISE
Some products may be damaged so much that they
cannot be sold. Other products may be stolen by
shoplifters or employees. These situations have a
serious effect on profits.
Assume that a product with a selling price of The Internet is gaining in popularity with
$5.00 is damaged or stolen. The product cost the advertisers. This new medium facilitates the
business $4.00, and operating expenses amounted to targeting of individuals with customized ads.
$.75 for each product. Expected net profit was $.25. But companies must learn how to use this me-
In order to recover the cost of that one damaged or dium. The Internet Advertising Bureau provides
stolen product, the business will have to sell 16 more information to help companies develop e-mail,
products than originally planned (16 products x wireless, and interactive television strategies.
$.25 = $4.00). It will have to sell another three prod- Point your browser to www.thomsonedu.
ucts to cover operating expenses. The business will com/school/bpmxtra. Identify the benefits of
not earn a profit on the sale of the 19 products if just membership in the IAB. Evaluate the informa-
one product out of 20 is damaged or stolen. To re- tion provided on the IAB site. How does the
duce the amount of damaged and stolen merchan- IAB help companies?
dise, companies may take actions such as employing
security guards or installing surveillance cameras and www.thomsonedu.com/school/bpmxtra
training employees to handle merchandise carefully.

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