2.Give the summary of the text Factors Affecting Pricing1

Determining a markup² policy is not simply a matter of deciding how much gross profit margin³ the firm wants. Offering the goods for sale at a predeter­mined price is only half of the selling activity; the other half is someone buying these goods. Prices at which goods will sell are affected by a variety of conditions. First and foremost to the small enter­prise, what is the competition charging? In a highly competitive market where all sellers are selling (from the customer's viewpoint) identical goods, prices will be determined by the forces of supply and demand. To avoid such a lack of control over pricing, the firm must distinguish its goods and ser­vices from those of the competition. Clever use of advertising, special sales, and distinctive customer services are all possible techniques for creating greater demand for your products. As demand for your goods increases, so does your capacity to charge higher prices.

Your target income group is also an important consideration. However, remember that although the well-to-do⁴ buy more of certain items, there are generally fewer wealthy buyers. Consequently, pric­ing will reflect a decision to aim at a small, but less budget-minded market or to aim at a larger low-priced market.

The nature of the good also affects price deci­sions. For instance, a grocery store may have an average markup price of 15 percent; however, it will average markup up canned goods only 10 percent while it marks up lettuce 30 percent. The reason is that there is little loss or risk in canned goods, but there is significant loss in a crate⁵ of lettuce. Similarly, seasonal items such as winter sporting apparel⁶ are high priced during the wintertime because they must be marked down after the season due to the risk of damage and style changes during the non-winter months.

One final constraint on pricing is the law. Since the passage of the Robinson-Patman Act of 1936, it has been illegal to discriminate among buyers by setting different selling prices. Setting price differ­ences to different buyers is permissible only insofar as the different prices reflect different costs of pro­duction and delivery to each buyer. Variations in costs do allow for some price variation, but discrim­inatory policies clearly invite legal action.

Promoting the product

As we have repeatedly noted, limited budgets are always a constraint⁷. With regard to promotional activities, the small business operator must be es­pecially wary⁸. Two common problems should be understood. First, there is the case of the overly tight-fisted⁹ enterpriser who believes that substantial operating savings can be obtained by cutting to the bone the promotional activities of advertising, sales promotion, publicity, and personal sales. In a sense, this person is an uncompromising egotist, appar­ently believing that what he or she has to sell is so important that the world will naturally beat a path to the front door. Such events may occasionally hap­pen, but they must be very rare.

In the booming information and computer in­dustries, many firms literally begin in garages and basements; but the truly successful soon recognize that they need to capture the attention of the vari­ous buying publics. Attendance at local and even national computer shows is a minimum require­ment. Expensive brochures and considerable door­bell ringing are also necessary. So it is for any enterprise—travel agency, real estate brokerage, restaurant, or parts manufacturer. As a beginning rule, the small entrepreneur must recognize that promotion is important—in some respects more important to the small firm than to a big one whose products, service, and corporate name are proba­bly already well-known. Consequently, the promo­tional budget must be at least sizeable enough to get the product or service before the public.

A second problem with small businesses is that they commonly do not get the most promotion for their money. Perhaps even worse than not bud­geting enough to promote the product is to pour the promotional dollars into useless or excessively expensive (comparing costs to sales return) pro­motional activities. For instance, it would be absurd for a suburban Chicago restauranteur who caters¹⁰ only to local diners (within five miles of the restau­rant) to buy a TV commercial spot on a Chicago station that services most of northern Illinois. Who in DeKalb would care? Indeed, does the restaurant owner really care if anyone in DeKalb knows about his sauerbraten¹¹? The example is excessively drawn, but the point should be obvious: Use your promo­tional effort to target your expected clientele¹², and use the vehicle that will reach them most effectively.

Pricing decisions related to product de­cisions. Although some latitude always exists in set­ting prices, the nature of the good or service being offered sets important price-making constraints. If you choose breadth-of-product range as your product strategy, invariably you are selecting a high-volume sales approach. Accordingly, custom­ers will expect relatively lower prices than they would have to pay in a sales outlet focusing on a depth-of-product strategy.

Regardless of the strategy chosen, the long-run objective of the firm remains to maximize its total profits. Over the short-run and over certain product lines offered for sale, profit maximization may not be the objective. Profits may be forgone today in hopes of establishing a market position; or negative profits on some products may be used as a device to increase sales on other profitable items.