BUSINESS ENTREPRENEURSHIP

(CUN704)
Module 6
Pricing and Economics of One Unit of Sale
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OVERVIEW
Module Six discusses the specific costs
of doing business and how to identify your
unit of sales and choose appropriate pricing
strategies based on expenses.

This presentation will explore the development

of a pricing strategy, different types of pricing
strategies, and the concept of the economics of
one unit of sale.
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PRICING STRATEGY
Pricing is an important consideration for an entrepreneur and something that
should be reviewed on a regular basis, especially if customer preferences and
interests change, or there is an increase in competition with the same products
or services.

“While there is no single recipe to determine pricing, the following is a general

sequence of steps that might be followed for developing the pricing of a new
product:

#1. Develop marketing strategy - perform marketing analysis,

segmentation, targeting, and positioning.”

Pricing Strategy: http://www.netmba.com/marketing/pricing/

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PRICING STRATEGY
“The following is a general sequence of steps that might be followed for
developing the pricing of a new product:

•“#2. Make marketing mix decisions - define the product, distribution, and
promotional tactics.
• #3. Estimate the demand curve - understand how quantity demanded
varies with price.
• #4. Calculate cost - include fixed and variable costs associated with the
product.”

Pricing Strategy: http://www.netmba.com/marketing/pricing/

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PRICING STRATEGY
“The following is a general sequence of steps that might be followed for
developing the pricing of a new product:

• #5. “Understand environmental factors - evaluate likely competitor

actions, understand legal constraints, etc.
• #6. Set pricing objectives - for example, profit maximization, revenue
maximization, or price stabilization (status quo).
• #7. Determine pricing - using information collected in the above steps,
select a pricing method, develop the pricing structure, and define discounts.”

Pricing Strategy: http://www.netmba.com/marketing/pricing/

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RULES OF PRICING

What many new entrepreneurs fail to understand is the complex nature of

pricing. While there are no exact rules that must be followed, there are general
guidelines or practices that can be used.

• “All prices must cover costs.

• The best and most effective way of lowering your sales prices is to lower
costs.
• Your prices must reflect the dynamics of cost, demand, changes in the market
and response to your competition.” (continued on the next slide)

Pricing Strategy: https://www.entrepreneur.com/article/38308

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RULES OF PRICING

What many new entrepreneurs fail to understand is the complex nature of

pricing. While there are no exact rules that must be followed, there are general
guidelines or practices that can be used.

• “Prices must be established to assure sales. Don't price against a competitive

operation alone. Rather, price to sell.
• Product utility, longevity, maintenance and end use must be judged
continually, and target prices adjusted accordingly.
• Prices must be set to preserve order in the marketplace.”

Pricing Strategy: https://www.entrepreneur.com/article/38308

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PRICING STRATEGIES
Establishing the price of a product or service is important as it determines if the
business will be successful. The pricing strategy established ultimately establish
how well profits can be maximized.
Here are some of the various strategies that businesses implement when setting
prices on their products and services.
#1. “Pricing at a Premium: With premium pricing, businesses set costs
higher than their competitors. Premium pricing is often most effective in the
early days of a product’s life cycle, and ideal for small businesses that sell
unique goods. Because customers need to perceive products as being worth the
higher price tag, a business must work hard to create a value perception.”
Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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PRICING STRATEGIES

#2. Pricing for Market Penetration

This pricing strategy begins with establishing

low prices as a means of attracting new customers
and this is very important for new products or services.

“Penetration strategies aim to attract buyers by offering lower

prices on goods and services. While many new companies use this technique to
draw attention away from their competition, penetration pricing does tend to
result in an initial loss of income for the business.”
Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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PRICING STRATEGIES
#3. Economy Pricing

Larger companies and retail chains are more likely to implement economy
pricing because they have an ability to negotiate costs, especially with vendors.
Newer and smaller businesses may not have that flexibility at the beginning.

“Economy pricing aims to attract the most price-conscious of consumers. With

this strategy, businesses minimize the costs associated with marketing and
production in order to keep product prices down. As a result, customers can
purchase the products they need without frills.”

Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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PRICING STRATEGIES
#4. Price Skimming

This is a reverse type of strategy from penetration pricing. If the product or

service being introduced is new, or has very few competitors, this strategy
recommends starting with a higher price point and gradually lowering it.

“One of the benefits of price skimming is that it allows businesses to maximize

profits on early adopters before dropping prices to attract more price-sensitive
consumers. Not only does price skimming help a small business recoup its
development costs, but it also creates an illusion of quality and exclusivity when
your item is first introduced to the marketplace.”
Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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PRICING STRATEGIES
#5. Psychology Pricing

This pricing strategy takes the focus off of the actual price and attempts to
create an emotional connection with the targeted customer, by connecting value
to the product or service and thereby justifying the price.

“For example, setting the price of a watch at $199 is proven to attract more
consumers than setting it at $200, even though the true difference here is quite
small. One explanation for this trend is that consumers tend to put more
attention on the first number on a price tag than the last. The goal of
psychology pricing is to increase demand by creating an illusion of enhanced
value for the consumer.”

Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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PRICING STRATEGIES
#6. Bundle Pricing

The concept of bundling is often used with cellular telephone companies and
cable television services. It is a method of selling more than one product or
service as bundles and consumers are often told that there is a cost savings
involved for bundling products or services together.

“With bundle pricing, small businesses sell multiple products for a lower rate
than consumers would face if they purchased each item individually. Not only is
bundling goods an effective way of moving unsold items that are taking up
space in your facility, but it can also increase the value perception in the eyes of
your customers, since you’re essentially giving them something for free.”
Source: http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-your-
business/
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THE ECONOMICS OF ONE UNIT OF SALE
Next we will consider profitability, which is a direct result of the pricing
strategies employed.

You are assigned an article to read: The Economics of One Unit of Sale.

Here are two excerpts to explain this concept:

“One important way to examine profitability is to look at how much profit the
business makes every time it sells one item.”

“This is where the concept of one unit of sale comes in. A unit of sale is what a
customer actually buys from you. It's the amount of product (or service) you use
to figure your operations and profit. The unit of sale is really the basic building
block of your business.”

Source: http://myfinanceclass.com/files/76211490.pdf
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EXAMPLE
The Economics of One Unit of Sale

“Let’s say, as an example, that you charge each gym member $50/month. You
also charge them a one-time $50 activation fee. On average, let’s say that an
average member remains a paying member for 12 months.

Let’s say that your costs to open were $100,000 which you need to eventually
recoup, and your ongoing costs are $50,000. Actual costs would be much higher
in most cities.

To break even on a month-to-month basis, you will need 1000 members paying
$50/month. If you keep signing up new members, you will need fewer
registered members, but the number of $50 transactions has to be 1000 to get
to the break-even point of $50,000 per month.”

Source: http://glowingstart.com/calculate-unit-economics-business/
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EXAMPLE

The Economics of One Unit of Sale

“Now think about how long it will take to get to a point where you are having
that many regular and new customers. Think about what will happen during the
first month. Maybe you will have 200 customers. The next month you might
have 300 customers. Different businesses grow at very different rates. In the
summer, people might want to exercise outside so you might actually have a
decrease in customers. The important thing here is to understand that for the
first year or so, this business will very possibly lose more and more money as
you improve your marketing initiatives and start to grow your customer base.

If the entrepreneur keeps working and, the business will mature and get to the
1000 customers per month and grow beyond that figure.”
Source: http://glowingstart.com/calculate-unit-economics-business/
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SUMMARY
This module discussed the specific costs of doing business and how to
identify your unit of sales and choose appropriate pricing strategies based
on expenses. Also explored was the development of a pricing strategy,
different types of pricing strategies, and the concept of the economics of one
unit of sale.
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RESOURCES
Elements of a Business Plan
https://www.entrepreneur.com/article/38308
Pricing Strategy
http://www.netmba.com/marketing/pricing/
6 Different Pricing Strategies: Which Is Right for Your Business?
http://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-
which-is-right-for-your-business/
The Economics of One Unit of Sale
http://myfinanceclass.com/files/76211490.pdf
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You have completed Module 6.
Once you close out of this Module you will see your assignment for
Module 6.

Module 6 Assignment:

Identify how you will define one unit of sale for your business. Calculate
WHAT IS and outline the various costs associated with each unit of sale for your
business. Provide a thorough explanation within your business plan
template of all of the fixed and variable expenses that must be
NEXT? considered, as well as how you chose your price point and strategy.
This will be included in the Pricing section of your Business Plan
Template.

Submit your template as a Word document and upload it for the

Module 6 Assignment.
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Module 6 Quiz:

WHAT IS After you complete the assignment for Module 6, close out of the
assignment section and you will see the Module 6 Quiz. After you
complete your quiz, please review it thoroughly and press SUBMIT.
NEXT? If you do not press SAVE, you may lose everything. You must complete
the Module 6 quiz before you can move on to Module 7.
 Next is Module 7:
WHAT IS • Financial Health of Your Company

NEXT? You’ll begin by reviewing the presentation for Module 7.