U.S. Small Business Administration                          FM-13







                     PRICING YOUR PRODUCTS





                  Financial Management Series



_________________________________________________________________





                 Pricing Your Products replaces

        Pricing Your Products and Services Profitably and

            A Pricing Checklist for Small Retailers



This publication is protected under copyright. No part may be

reproduced, transmitted or transcribed without permission of the

author.  SBA retains and irrevocable, worldwide, nonexclusive

royalty-free, unlimited license to use this copyrighted material.



While we consider the contents of this publication to be of

general merit, its sponsorship by the U.S. Small Business

Administration does not necessarily constitute an endorsement of

the views and opinions of the authors or the products and

services of the companies with which they are affiliated.



All of SBA's programs and services are extended to the public on

a nondiscriminatory basis.



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                      TABLE OF CONTENTS



INTRODUCTION



RETAIL PRICING

     Retail Costs and Pricing 1

     General Pricing Techniques    1

     Breakeven 2



PRICING FOR SERVICES

     Service Costs and Pricing     3

     Components of Costs for Services   3

     Examples of a Cost Calculation     4

     Figuring Profit     4

     Figuring Costs and Profits for a Consulting Service    5

     Checklist for Pricing Policies and Strategies     5

     Summary   6



APPENDIXES

     A. Pricing Checklist for Retailers 7

     B. Information Resources 13   

 

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INTRODUCTION



The primary goal of most businesses is to make a profit. There

are many factors that affect the profitability of a business,

such as management, location, cost of labor, quality of product

or service, market demand and competition. In our free enterprise

system the right to establish a price is yours. Market demand

controls the response to your product or services.



You must understand the market for your product or service, the

channels of distribution and the competition before you establish

prices. You must know all costs and carefully analyze them. The

marketplace responds rapidly to technological advances,

international competition and a knowledgeable buying public. You

must constantly keep abreast of all factors that will affect

pricing and be ready to make necessary changes.



This publication covers retail pricing, pricing for services and

pricing for a consulting service. Appendix A is a checklist to

review pricing policies and strategies. Appendix B offers

suggestions for other information resources.

_________________________________________________________________



RETAIL PRICING



Retail Costs and Pricing



In a successful business, prices are set to cover total costs

plus some margin of profit. In a retail business, two costs are

associated with the product: the cost of acquiring the goods,

called cost of goods, and the costs of operating the business to

sell the goods, called operating expenses.



The cost of goods includes the price paid for the merchandise

plus freight, import duties and any handling costs. The cost of

goods can be reduced by taking advantage of quantity discounts or

time payment discounts (paying before a certain date).



Operating expenses include wages, advertising, management

salaries, rent, utilities and office supplies. Most of these

costs are not directly attributed to any one product item, such

as a single purse; they must be spread out among all the items

sold in a given time period.



General Pricing Techniques



Markup on cost is accomplished by adding some percentage of cost

to the cost of goods (merchandise  shipping).



Example:

 

                   Lisa's Purse Shop

             Calculation of selling price



             Cost of one purse   $12.00

             x Markup percentage 33% 



             = Markup amount      $4.00



             Cost of one purse   $12.00

             + Markup amount      $4.00



             = Selling price     $16.00 for one purse



The 33 percent markup must cover all operating expenses (wages,

rent, advertising, etc.) and provide some margin of profit. For

example, Lisa's Purse Shop may figure 10 percent for wages,

6 percent for rent, 4 percent for advertising and 13 percent for

profit.



The markup is sometimes expressed as a percentage of selling or

retail price instead of cost. Most retailers prefer to express

their markup as a percentage of retail price. Using the example

above you would determine the retail markup percentage as

follows:



   $4.00 = dollar amount of markup,

   ____________________________________ = 25% retail markup



   $16.00 = retail selling price,  



A business might choose to use a standard markup percentage on

all products, or it may have different markups for different

goods. A problem with the standard markup is that it doesn't

recognize cost differences in selling different products. If

product A costs far more to advertise or sell than product B, a

standard markup percentage may produce a loss on product A and a

greater-than-average profit on product B.



It is important to maintain an overall or average percentage of

markup to return the profit percentage you establish. You must

also allow for markdowns. Therefore, you must establish an

initial markup percentage, which becomes the average markup. The

initial markup is figured as follows:



Initial markup percentage =  Operating expenses +  desired profit

                                divided by   Net sales



Breakeven



Breakeven is simply the point at which all costs are recovered

and you begin to make a profit. Once you have established an

average markup, the breakeven point can be determined. There are

several formulas to use in determining breakeven. One simple

formula is provided here, but we recommend that you check with

your accountant or an accounting textbook to fully understand how

best to figure a breakeven for your business.



            Breakeven point =  Operating expenses

            Divided by         Markup percentage



example:



   $50,000 = operating expenses

   _____________________________ = $166,666.67 breakeven sales



   30% = markup percentage

          (average)



The breakeven price is figured the same for a service business as

it is for a product-based business. However, many business owners

prefer to figure breakeven for individual products or services,

so they know which products to promote or discontinue.



Suggested retail price. A common pricing practice among small

businesses is to follow the suggested retail prices supplied by

the manufacturer. This allows the business to avoid the

decision-making process and the trouble of monitoring the

competition. The suggested retail price is easy to use, but it

can cause problems. It may create an undesirable price image, and

it doesn't consider the competition.



Competitive position refers to a strategy in which a firm bases

its prices on those of its competitors. A small retailer should

compare prices with similar stores. Do not try to compete with

the prices set by large stores they can buy larger volumes, so

their cost per unit is less. Instead, look at nonprice issues.

For example, compare the services offered by the competition.

Often customers will pay more for merchandise to obtain the type

of service that they seek.



Pricing below competition means beating the competitor's price.

Many vendors have been very successful using this pricing

strategy, because they have greatly increased sales. Because this

pricing strategy reduces the profit margin per sale, a firm needs

to increase its sales and reduce costs.



   *  Obtain the best prices possible for the merchandise.



   *  Locate the business in an inexpensive area or facility.



   *  Closely control inventory.



   *  Limit the lines to fast-moving items.

 

   *  Design advertising to concentrate on price specials.



   *  Offer no or limited services



Below competition pricing is a difficult pricing policy to

maintain, because every cost component must constantly be

monitored and consistently adjusted. It also exposes firms to

pricing wars competitors can retaliate by matching the price

cutter, leaving both parties worse off.



Pricing above the competition is possible when nonprice

considerations are important to buyers. Nonprice considerations

that may be important enough to customers to justify higher

prices include



   *  service considerations, such as delivery, speed of service,

      satisfactory handling of customer complaints, knowledge of

      product or service, and a helpful and friendly attitude;



   *  a convenient or exclusive location; and



   *  exclusive merchandise. A store may carry lines of well-

      known or high-quality brand names that are not available

      elsewhere. A store might get particular brands for a given

      trade area. The use of exclusive agreements avoids

      competitive pricing.



Markdowns, or price reductions, are a necessary part of doing

business because inventory levels may become too high as a result

of overbuying, seasonal merchandise, shopworn merchandise,

misjudged customer responses, poor personal selling, lack of

promotion and advertising or the competition's lowering the price

of the same merchandise.



There are a number of theories about when it is best to take

markdowns. This is a decision that will vary greatly with the

type of merchandise, amount of competition, season of the year

and amount of stock on hand. Every business should try to avoid

being left with a lot of dated merchandise that will be difficult

to sell.



Price lining refers to a marketing strategy based on price. This

strategy targets a specific segment of the buying public by

carrying products only in a specific price range. For example, a

store may wish to attract customers willing to pay over $50 for a

purse. Price lining has many advantages, among them the

following:



   *  reduced errors by sales personnel;



   *  ease of selection for customers;



   *  reduced inventory by limiting the number of items in a

      category;



   *  reduced storage costs as a result of smaller inventory;



   *  ease of merchandise selection; and



   *  merchandise targeted to clientele.



A disadvantage to price lining is that by focusing too much on

price, the store may overlook issues of quality or consumer

buying trends. It also limits the ability of the business to meet

competitors' prices.



Odd pricing -- with figures that end in 5, 7 and most often 9 --

is used for psychological reasons. Consumers tend to round down a

price of $39.95 to $39, rather than rounding it up to $40.

However, this is not considered to be as effective today as it

was in the past.



Multiple pricing is the practice of promoting a number of units

for a single price. For example, two for $1.98. This is useful

primarily in low-cost, consumable products such as shampoo or

toothpaste. Many stores find this to be a desirable pricing

strategy for sales and year-end clearances.

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PRICING FOR SERVICES



Service business pricing is more complex than retail pricing;

however, the price is reached the same way -- cost plus

operating expenses plus the desired profit. Services are more

difficult to price because costs may be harder to estimate and

the competition might not be as easy to compare.



Service Costs and Pricing



Each service has different costs. Many small service businesses

fail to analyze the costs involved in each service and therefore

fail to price their services profitably. They may make a profit

on certain services and lose money on others, not knowing which

is which. By analyzing the costs associated with each service,

you can set prices to maximize profits and eliminate unprofitable

services.



Components of Costs for Services



The cost of producing any service is composed of three parts:



     1.  materials



     2.  labor



     3.  overhead



Materials cost is the cost of materials used directly in the

final product, such as sparkplugs and gaskets in the repair of an

engine. Supplies such as paper towels are part of overhead, not

materials costs. Materials costs must be determined and updated

frequently. A cost list must always be used in preparing a bid or

quoting a job. If there are shipping, handling or storage costs

for materials, they must be included in the total materials

costs.



Labor cost is the cost of work directly applied to a service,

such as a mechanic's work. Work not directly applied to the

service, such as cleaning up, is an overhead cost. Direct labor

costs are derived by multiplying the cost of labor per hour by

the number of hours required to complete the job. Use a time card

and clock to determine the number of hours of labor involved in

each service. Remember to include not only the amount paid

directly to the worker, but also all fringe benefits. These

include social security, workers' compensation, unemployment

compensation and any other benefits such as insurance and

retirement benefits.



Example:



                     Graham's Garage 

                   Labor cost per hour



                Hourly wages     =  $10.00/hr 

                Fringe benefits  =   $3.00/hr (or 30%)*



                    Total costs  =  $13.99/hour



         *30% is a common benefit percentage.



Overhead cost includes all costs other than direct materials and

direct labor. Overhead is the indirect cost of the service.

Usually there are people on a company's payroll who perform

support services that are not charged to direct labor but must be

included as a cost. Some examples of these services are clerical,

payroll, legal, janitorial and supply. Insurance, taxes,

depreciation, rent, accounting, advertising, office supplies,

utilities and transportation are also part of the overhead cost.



A reasonable amount of the overhead cost must be allocated to

each service performed. The overhead rate can be expressed as a

percentage or as an hourly rate.



In many businesses, more expensive equipment is used by higher

paid employees; thus, overhead cost is more closely related to

labor cost than to labor hours. In this situation, the overhead

cost is allocated on the basis of direct labor cost and expressed

as a percentage as follows:



                               Total overhead cost

               Overhead rate =-------------------------

                               Total direct labor cost 



This format is most commonly used in businesses such as machine

shops, automotive repair shops, and job shop production. When

there is relatively little difference between the hourly wages

for employees, or little relationship between worker skill and

equipment used, the following hourly rate formula is followed:



                                 Total overhead cost

                Overhead rate = ----------------------

                                Total direct labor hours

 

The following examples show the two types of overhead rate

calculation:



                        Graham's Garage 

                Calculation of overhead rate



                                 Total overhead costs

                 Overhead rate = --------------------             

                 (percentage)    Total direct labor costs





                               = $40,000.00

                                 ---------- 

                                 $50,000.00



             or                = 0.8 or 80%



                Overhead rate  = Total overhead costs

                                 --------------------   

                (hourly rate)    Total direct labor hours, 

  

                               = $40,000.00

                                 ------------

                                 4,000 hours



                               = $10.00 per direct labor hour

 

In developing overhead costs it is important not to depend on

last year's costs. Charges must be revised to reflect current

costs, including inflation and higher benefit rates. It is best

to project the costs for the current six-month period and include

increased executive salaries as well as any other projected

costs.



Examples of a Cost Calculation



Here is an example combining the components of costs to determine

the total cost of a single job:



                          Graham's Garage 

                Total cost to fix Mr. Rhodes' car:



          Material cost = material used + shipping cost

                        = $18.00 + 2.00

                        = $20.00



          Labor cost    =  Direct labor cost per hour x hours

                           required  

                        =  $13.00 per hour x 3 hours

                        =  $39.00

Two types of overhead rate have been discussed. We will use both

to calculate overhead cost for the example:



            Overhead cost = Direct labor cost x overhead rate

                          = $39.00  x  80%

                          = $31.20



or

            Overhead cost = Direct labor hours x  overhead rate

                          = 3 hours x $10.00 per hour

                          = $30.00  



Because Graham's Garage usually uses the percent of cost overhead

rate, we will use the $31.20 figure instead of $30.00 as the

overhead cost. The total cost of the repair is tallied below.



                     Material cost = $20.00  

                     Direct labor  = $39.00

                     Overhead cost = $31.20

                             Total   $90.20



Figuring Profit



Profit can be figured several ways. One way is to add a

percentage to each of the cost factors, for example,



                    Material   Labor   Overhead    Total

 

     Cost            $20.00    $39.00    $31.20    $90.20

x percent             x  15%    x  25%   x   25% 

----------           -------   -------   -------

  profit              $3.00     $9.75     $7.80    $20.55





     Cost            $20.00    $39.00    $31.20    $90.20

+ profit               3.00      9.75     $7.50    $20.55

--------             ------    ------    ------    ------

= charge             $23.00    $48.75    $38.70   $110.75



Another way is to decide that you wish to make a 20 percent

profit. Then you can simply add all of the costs plus 20 percent

of the total ($90 cost  20% = $18; $90  $18 = $108 = price).

There may be times when you purchase materials at a lower price

and can therefore add a higher percentage of profit.



Figuring Costs and Profits for a Consulting Service



Pricing consulting services, where primarily one's own labor or

expertise is used, is somewhat different from pricing a service

that uses materials and the labor of others. Most consultants

price their service by the hour. If they are senior consultants

they will charge more for their own time than for the use of a

junior or less experienced consultant. The rate varies depending

on the nature of the assignment and the individual's expertise.

However, it is very important that one charge for an adequate

number of hours. Travel time must also be included; usually the

travel expense is an extra charge. Sometimes a consultant is

asked to price a service on a contract basis. The contract should

take into account professional time, clerical support, computer

or other special services (such as printing) and overhead

expenses (rent, utilities, equipment, supplies, sales and

marketing expenses, insurance and fringe benefits).



The following is an example:



                   Law Firm of Dixon & Wesley 

             Charges for services in month of August



   Professional charges: 

   Senior consultant     10 hours      $75.00 = $750.00

   Junior consultant     15 hours      $35.00 = $525.00

   Clerical               7 hours      $18.00 = $126.00



            Total        32 hours              $1401.00



     Overhead rates: $10,300 Overhead expense per year

                     ----------------------------------

                      1,030 Chargeable hours per year



                         = $10.00 per hour



    Overhead charge rate = chargeable hours x overhead

                     $10 = $320.00



    Travel: , 



    Airfare at $275.00  x 2 trips       =  $550.00

   Per diem at $120.00 per day x 3 days =  $375.00 

         Contract total                 = $2646.00



In selling consulting and other professional services it is

unlikely that 100 percent of spent time will be billed to

clients. Therefore, hourly or contract fees must be substantial

enough to cover costs during slow periods. It is for this reason

that one-half of the total normal yearly work hours is used in

figuring overhead rates. It is desirable to obtain a long-term,

monthly or contract assignment whenever possible.



A common mistake of many new or inexperienced consultants is to

underestimate the number of hours and additional charges or

expenses that they may incur. If the policy is to charge only an

hourly rate plus travel expenses, be sure that the hourly rate

will cover salary requirements, operating expenses and the profit

percentage you desire.



Checklist for Pricing Policies and Strategies



The following list of questions will help you select the pricing

policies and strategies that will best suit your business,

allowing you to remain competitive and providing you with the

profit you want.



  1.  Do you price all items at a level that provides an adequate

      profit margin? If not, why?



  2.  Do you constantly monitor costs and make price changes to

      provide for continued profitability, particularly in

      periods of rapid inflation?



  3.  Do you price to cover your variable costs and fixed costs?



  4.  Is your goal to find the price-volume combination that will

      maximize profits?



  5.  When setting a price strategy, do you consider these

      factors:

      a. channels of distribution?

      b. competitive and legal forces?

      c. annual volume and life-cycle volume?

      d. opportunities for special market promotions?



  6.  Is your price consistent with the product image?



  7.  Because customers often equate the quality of unknown

      products with their price, do you adjust prices

      accordingly?



  8.  Do you reduce prices whenever the added volume resulting

      from the reduction produces sufficient sales revenue to

      offset the added costs of increased production?



  9.  When reducing prices, do you consider your competitors'

      probable reactions?



 10.  Do you want your firm to be a price leader?



 11.  Do your initial markups cover 

      a. operations, particularly selling expenses?

      b. profit?

      c. subsequent price reductions?



 12.  Does your company break down costs by product to price

      effectively?



 13.  Does your company practice price lining?



 14.  Does your company practice odd pricing?



 15.  To avoid retaliation by competitors, have you tried adding

      extra services, providing warranties or paying

      transportation costs rather than lowering prices?



 16.  Do you realize that facilities have certain costs whether

      you use them or not?



Use the next few blank lines to write in question that may be of

specific concern to your business's pricing structures.



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Summary



Remember, although it is your right to establish prices for your

products and services, it is your customers who will decide

whether they are willing and able to pay your price, and your

competitors will influence your customers' buying decisions. We

recommend that you do extensive research on your industry or

business, your products or services, your customers and your

competition. This publication is intended to be an overview; we

advise that you check with local bookstores, libraries and

universities for additional sources of information on pricing and

profits. Accounting textbooks are often helpful. You may also

want to obtain other U.S. Small Business Administration

publications (see Appendix B: Information Resources).



It is difficult to say which component of pricing is more

important than another. The key to success is to have a

well-planned strategy and established policies and to constantly

monitor prices and operating costs to ensure a profit. It is very

important that you project the percentage of markdowns

anticipated and build them into your initial price to obtain the

projected profit. For a consulting business, you should project

how many hours of your services you will need to bill.



It is important to remember that the image of your business is

crucial to obtaining and keeping the clientele and that your

pricing structure and policies are a major component of your

image.

_______________________________________________________________



APPENDIX A: PRICING CHECKLIST FOR RETAILERS



These 52 questions probe the considerations -- from markup to

pricing strategy to adjustments -- that lead to correct pricing

decisions. You can use this checklist to establish prices in your

store or to periodically review your pricing policy.



Price influences the quantities of various items that consumers

will buy which in turn affects total revenue and profit. Thus

correct pricing decisions are a key to successful retail

management. The checklist has been developed to help smaller

retailers make systematic informed decisions on pricing

strategies and tactics.



This checklist should be especially useful to a new retailer who

is making pricing decisions for the first time; however

established retailers can also benefit. They can use it as a

reminder of all the individual pricing decisions they should

review periodically. It can also be used to train new employees

who will have pricing authority.



The Central Concept of Markup



A major step toward making a profit in retailing is selling

merchandise at a retail price called markup (or occasionally

markon). From an arithmetic standpoint markup is calculated as

follows:



   Dollar markup = Retail price minus Cost of the merchandise



                                Dollar markup 

            Percentage markup = ----------------- 

                                Retail price 

If an item cost $6.50 and you believe consumers will buy it at

$10 the dollar markup is $3.50 ($10  $6.50). The percentage

markup is 35 percent ($3.50 divided by $10). Anyone involved in

retail pricing should be as knowledgeable about these two

formulas as about the name and preferences of his or her best

customer!



Two other key points about markup should be mentioned. First the

cost of merchandise used to calculate markup consists of the base

invoice price for the merchandise plus any transportation charges

minus any quantity and cash discounts given by the seller. Second

retail price rather than cost is ordinarily used to calculate

percentage markup. The reason for this is that when other

operating figures -- such as wages advertising expenses and

profits -- are expressed as a percentage all are based on retail

price rather than cost of the merchandise.



Target Consumers and the Retailing Mix



In this section your attention is directed to price as it relates

to your potential customers. These questions examine merchandise

location promotion and customer services that will be combined

with price to attempt to satisfy shoppers and make a profit.



                                                       Yes   No



 1. Is the relative price of this item very important

    to your target consumers?                         _____ _____



    The importance of price depends on the specific

    product and on the specific individual. Some 

    shoppers are very price conscious; others want 

    convenience and knowledgeable sales personnel.

    Because of these variations you need to learn 

    about your customers' desires in relation to 

    different products. Having sales personnel seek

    feedback from shoppers is a good starting point.  



 2. Are prices based on estimates of the number of 

    units that consumers will demand at various 

    price levels?                                     _____ _____

    Demand-oriented pricing is superior to cost-

    oriented pricing. In the cost approach a 

    predetermined amount is added to the cost of

    the merchandise whereas the demand approach 

    considers what consumers are willing to pay.  



 3. Have you established a price range for the 

    product?                                          _____ _____

    The cost of merchandise will be at one end of

    the price range and the level above which 

    consumers will not buy the product at the

    other end.  



 4. Have you considered what price strategies would

    be compatible with your store's total retailing

    mix including merchandise location promotion

    and services?                                     _____ _____



 5. Will trade-ins be accepted as part of the purchase

    price on items such as appliances and television

    sets?                                             _____ _____



Supplier and Competitor Considerations



This set of questions looks outside your firm to two factors that

you cannot directly control -- suppliers and competitors.



                                                        Yes   No



6. Do you have final pricing authority?               _____ _____

   With the repeal of fair trade laws yes answers 

   will be more common than in previous years. Still

   a supplier can control retail prices by refusing

   to deal with nonconforming stores (a tactic that

   may be illegal) or by selling to you on consignment.  



 7. Do you know what direct competitors are doing 

    price-wise?                                       _____ _____



 8. Do you regularly review competitors' ads to 

    obtain information on their prices?               _____ _____



 9. Is your store large enough to employ either a

    full-time or part-time comparison shopper?        _____ _____

    These three questions emphasize the point that

    you must watch competitors' prices so that your

    prices will not be far out of line -- too high

    or too low -- without good reason. Of course 

    there may be a good reason for out-of-the-

    ordinary prices such as seeking a special price

    image.  



A Price Level Strategy



Selecting a general level of prices in relation to competition is

a key strategic decision perhaps the most important.



                                                      Yes   No

10. Should your overall strategy be to sell at 

    prevailing market price levels?                   _____ _____

    The other alternatives are an above-the-market

    strategy or a below-the-market strategy.  



11. Should competitors' temporary price reductions

    ever be matched?                                  _____ _____



12. Could private-brand merchandise be obtained to

    avoid direct price competition?                   _____ _____



Calculating Planned Initial Markup



In this section you will have to look inside your business taking

into account sales expenses and profits before setting prices.

The point is that your initial markup must be large enough to

cover anticipated expenses and reductions and still produce a

satisfactory profit.



                                                      Yes    No



13. Have you estimated sales operating expenses and

    reductions for the next selling season?           _____ _____



14. Have you established a profit objective for the

    next selling season?                              _____ _____



15. Given estimated sales expenses and reductions 

    have you planned initial markup?                  _____ _____

    This figure is calculated with the following

    formula:  



    Initial markup  

    Percentage     Operating expenses + reductions + profit

                =  ----------------------------------------

                           Net sales + reductions



    Reductions consist of markdowns stock shortages and

    employee and customer discounts. The example uses 

    dollar amounts but estimates can also be 

    percentages. If the retailer wants a $4000 profit

    initial markup percentage can be calculated as 

    follows:  



    Initial markup percentage = $34000 + $6000 + $4000 

                                 ----------------------= 44%

                                   $94000 + $6000 

 

    The resulting figure 44 percent in this example

    indicates the markup needed on the average to make

    the desired profit.  



16. Would it be appropriate to have different initial

    markup figures for various lines of merchandise

    or services?                                      _____ _____

    You should seriously consider different markup

    figures when some lines have very different

    characteristics. For instance -- a clothing

    retailer might logically have different initial

    markup figures for suits shirts pants and

    accessories. You may want those items with the

    highest turnover rates to carry the lowest initial

    markup.  



Store Policies



Having calculated an initial markup figure you could proceed to

set prices on your merchandise. But an important decision such as

this should not be rushed. Instead you should consider additional

factors that suggest what would be the best price.



                                                      Yes    No



17. Is your tentative price compatible with 

    established store policies?                       _____ _____

    Policies are written guidelines indicating 

    appropriate methods or action in different

    situations. If established with care they can

    save you time in decision making and provide

    for consistent treatment of shoppers. You should

    consider the following policy areas:  



18. Will a one-price system under which the same price 

    is charged to every purchaser of a particular item

    be used on all items?                             _____ _____

    The alternative is to negotiate price with

    consumers.  



19. Will odd-ending prices such as $1.98 or $44.95 be 

    more appealing to your customers than even-ending

    prices?                                           _____ _____



20. Will consumers buy more if multiple pricing such

    as two for $8.50 is used?                         _____ _____ 



21. Should any leader offerings (selected products

    with quite low less profitable prices) be used?   _____ _____



22. Have the characteristics of an effective leader

    offering been considered?                         _____ _____

    Ordinarily a leader offering needs the following

    characteristics to accomplish its purpose of

    generating shopper traffic: used by most people

    -- bought frequently very familiar regular price 

    and not a large expenditure for consumers.  





23. Will price lining -- the practice of setting up

    distinct price points such as $5.00, $7.50 and

    $10.00 and then marking all related merchandise

    at these points -- be used?                       _____ _____



24. Would price lining by zones (such as $5.00, $7.50

    and $12.50 5.00) be more appropriate than price

    points?                                           _____ _____

   

25. Will cents-off coupons be used in newspaper ads

    or mailed to selected consumers on any occasion?  _____ _____

   

26. Would periodic special sales combining reduced

    prices and heavier advertising be consistent with

    the store image you are seeking?                  _____ _____

   

27. Do certain items have greater appeal than others

    when they are part of a special sale?             _____ _____

   

28. Has the impact of various sale items on profit 

    been considered?                                  _____ _____

    Sale prices may mean little or no profit on these

    items but the sale may contribute to total profits

    by bringing in shoppers who may also buy some 

    regularly priced (and profitable) merchandise and

    by attracting new customers. You should avoid

    featuring items that require a large amount of

    labor which in turn would reduce or erase profits.

    For instance according to this criterion shirts

    would be a better special sale item than men's 

    suits that often require free alterations.  



29. Will rain checks be issued to consumers who come

    in for merchandise that is temporarily out of 

    stock?                                            _____ _____

    Rain checks are required in some situations. 

    Consult your lawyer or the regional Federal Trade

    Commission office for specific advice regarding

    whether they are needed in the sale you plan.  

   

Nature of the Merchandise



In this section you will be considering how selected

characteristics of particular merchandise affect planned initial

markup.

                                                        Yes   No

30. Did you get a "good deal" on the wholesale price 

    of this merchandise?                              _____ _____



31. Is this item at the peak of its popularity?       _____ _____

   

32. Are handling and selling costs relatively great

    due to the bulkiness of the product its low 

    turnover rate or its requiring much personal 

    selling installation or alterations?              _____ _____

   

33. Are relatively large reductions expected due to

    markdowns spoilage breakage or theft?             _____ _____

    With respect to the preceding four questions "yes"

    answers suggest the possibility of or need for

    larger than normal initial markups. For example 

    very fashionable clothing often carries a higher

    markup than basic clothing such as underwear 

    because the particular fashion may suddenly

    lose its appeal to consumers.  

   

34. Will customer services such as delivery alterations

    gift wrapping and installation be free to 

    customers?                                        _____ _____

    The alternative is to charge for some or all of 

    these services. 



Environmental Considerations



The questions in this section focus your attention on three

factors outside your business: economic conditions laws and

consumerism.

                                                       Yes   No

35. If your state has an unfair sales practices act

    that requires minimum markups on certain 

    merchandise do your prices comply with this 

    statute?                                          _____ _____

   

36. Are economic conditions in your trading area 

    abnormal?                                         _____ _____

    Consumers tend to be more price-conscious when

    the economy is depressed suggesting that lower

    than normal markups may be needed to be

    competitive. On the other hand shoppers are less

    price-conscious when the economy is booming which

    would permit larger markups (on a selective basis).

   

37. Are the ways in which your prices are displayed

    and promoted compatible with consumerism one part

    of which has been a call for more straightforward

    price information?                                _____ _____



38. If yours is a grocery store is it feasible to use

    unit pricing in which the item's cost per some 

    standard measure is indicated?                    _____ _____

    Having answered these questions you are ready to

    establish retail prices. When you have decided on

    an appropriate percentage markup 35 percent on a

    garden hose for example the next step is to

    determine what percentage of the still unknown

    retail price is represented by the cost figure.

    The basic markup formula is simply rearranged

    to do this:  



    Cost = Retail -  price  markup  

    Cost = 100% - 35% = 65%  

   

    The dollar cost say $3.25 for the garden hose is

    plugged into the following formula to arrive at

    the retail price:  

   

    Retail price = Dollar cost = $3.25 = $5.00

                    ----------   ------

                Percentage cost  65% (or .65) 

  

One other consideration is necessary:



39. Is the retail price consistent with your planned

    initial markup?                                   _____ _____

   

Adjustments



It would be ideal if all items sold at their original retail

prices. But we know that things are not always ideal. Therefore a

section on price adjustments is necessary.

                                                       Yes    No



40. Are additional markups called for because 

    wholesale prices have increased or because an 

    item's low price causes consumers to question

    its quality?                                      _____ _____

   

41. Should employees be given purchase discounts?     _____ _____

   

42. Should any groups of customers such as students

    or senior citizens be given purchase discounts?   _____ _____

   

43. When markdowns appear necessary have you first

    considered other alternatives such as retaining

    price but changing another element of the 

    retailing mix or storing the merchandise until the

    next selling season?                              _____ _____

   

44. Has an attempt been made to identify causes of

    markdown so that steps can be taken to minimize

    the number of avoidable buying selling and 

    pricing errors that cause markdowns?              _____ _____

   

45. Has the relationship between timing and size of

    markdowns been taken into account?                _____ _____

    In general markdowns taken early in the selling

    season or shortly after sales slow down are 

    smaller than late markdowns. Whether an early or

    late markdown is appropriate in a particular

    situation depends on how many consumers might 

    still be interested in the product the size of

    the initial markup and the amount of merchandise

    remaining in stock.  

   

46. Would scheduled or automatic markdowns at 

    specified intervals be appropriate?               _____ _____

   

47. Is the size of the markdown just enough to 

    stimulate purchases?                              _____ _____

    This question stresses the point that you have 

    to observe the effects of markdowns so that you

    know what size markdowns are "just enough."

   

48. Has a procedure been worked out for markdowns on

    price-lined merchandise?                          _____ _____

   

49. Is the markdown price calculated from the off-

    retail percentage?                                _____ _____

    This question gets you into the arithmetic of

    markdowns. Usually you first tentatively decide 

    on the percentage amount price must be marked 

    down to excite consumers. For example if you think

    a 25 percent markdown will be necessary to sell a

    lavender sofa the dollar amount of the markdown is

    calculated as follows:  

    

    Dollar markdown -  Off-retail percentage

              x  Previous retail price     

    Dollar markdown - 25% (or .25) x 500 = $125    

   

    The markdown price is obtained by subtracting

    the dollar markdown from the previous retail price.

    The sofa would be $375 after taking the markdown.  

   

50. Has the cost of the merchandise been considered 

    before setting the markdown price?                _____ _____

    This is not to say that a markdown price should

    never be lower than cost; on the contrary a price

    that low may be your only hope of generating some

    revenue from the item. But cost should be 

    considered to make sure that below-cost markdown

    prices are the exception in your store rather 

    than being so common that your total profits 

    suffer.  

   

51. Have procedures for recording the dollar amount

    percentages and probable cause of markdowns been

    set up?                                           _____ _____

    Markdown analysis can provide information to help

    calculate initial markup to reduce errors that 

    cause markdowns and to evaluate suppliers.  

   

52. Have you marked the calendar for a periodic review

    of your pricing decision?                         _____ _____

    This checklist should help you avoid making 

    careless pricing decisions and lay a solid 

    foundation of effective prices to build retail

    profits.  

_________________________________________________________________



APPENDIX B: INFORMATION RESOURCES



U.S. Small Business Administration (SBA)



The SBA offers an extensive selection of information on most

business management topics, from how to start a business to

exporting your products.



SBA has offices throughout the country. Consult the U.S. 

Government section in your telephone directory for the office

nearest you. SBA offers a number of programs and services,

including training and educational programs, counseling services,

financial programs and contract assistance. Ask about



     *     SCORE: Counselors to Americas Small Business, a 

           national organization sponsored by SBA of over 11,000

           volunteer business executives who provide free

           counseling, workshops and seminars to prospective and

           existing small business people.  Free online counseling

           and training at www.score.org. 



     *     Small Business Development Centers (SBDCs), sponsored

           by the SBA in partnership with state governments, the

           educational community and the private sector. They

           provide assistance, counseling and training to 

           prospective and existing business people.



     *     Womens Business Centers (WBCs), sponsored by the SBA  

           in partnership with local non-government organizations

           across the nation. Centers are geared specifically to 

           provide training for women in finance, management,

           marketing, procurement and the Internet.



For more information about SBA business development programs and

services call the SBA Small Business Answer Desk at 1-800-U-ASK-

SBA (827-5722) or visit our website, www.sba.gov. 



Other U.S. Government Resources



Many publications on business management and other related topics

are available from the Government Printing Office (GPO). GPO

bookstores are located in 24 major cities and are listed in the

Yellow Pages under the bookstore heading. Find a Catalog of

Government Publications at http://catalog.gpo.gov/F 



Many federal agencies offer Websites and publications of interest 

to small businesses. There is a nominal fee for some, but most 

are free. Below is a selected list of government agencies that 

provide publications and other services targeted to small 

businesses. To get their publications, contact the regional 

offices listed in the telephone directory or write to the 

addresses below:



Federal Citizen Information Center (FCIC)

Http://www.pueblo.gsa.gov 

1-800-333-4636

The CIO offers a consumer information catalog of federal

publications.



Consumer Product Safety Commission (CPSC)

Publications Request

Washington, DC 20207

http://www.cpsc.gov/cpscpub/pubs/pub_idx.html 

The CPSC offers guidelines for product safety requirements.



U.S. Department of Agriculture (USDA)

12th Street and Independence Avenue, SW

Washington, DC 20250

http://www.usda.gov 

The USDA offers publications on selling to the USDA. Publications

and programs on entrepreneurship are also available through 

county extension offices nationwide.



U.S. Department of Commerce (DOC)

Office of Business Liaison

14th Street and Constitution Avenue, NW

Washington, DC 20230

http://www.osec.doc.gov/obl/ 

DOC's Business Liaison Center provides listings of business

opportunities available in the federal government. This service

also will refer businesses to different programs and services in

the DOC and other federal agencies.



U.S. Department of Health and Human Services (HHS)

Substance Abuse and Mental Health Services Administration

1 Choke Cherry Road

Rockville, MD 20857

http://www.workplace.samhsa.gov 

Helpline: 1-800-workplace. Provides information on Employee

Assistance Programs Drug, Alcohol and other Substance Abuse.



U.S. Department of Labor (DOL)

Employment Standards Administration

200 Constitution Avenue, NW

Washington, DC 20210

The DOL offers publications on compliance with labor laws.



U.S. Department of Treasury

Internal Revenue Service (IRS)

1500 Pennsylvania Avenue NW

Washington DC 20230

http://www.irs.gov/business/index.html 

The IRS offers information on tax requirements for small

businesses.



U.S. Environmental Protection Agency (EPA)

Small Business Ombudsman

1200 Pennsylvania Avenue NW

Washington, DC 20480

http://epa.gov/sbo

Hotline: 1-800-368-5888

The EPA offers more than 100 publications designed to help small

businesses understand how they can comply with EPA regulations.



U.S. Food and Drug Administration (FDA)

5600 Fishers Lane

Rockville MD 20857-0001

http://www.fda.gov

Hotline: 1-888-463-6332

The FDA offers information on packaging and labeling requirements

for food and food-related products.



For More Information



A librarian can help you locate the specific information you need

in reference books. Most libraries have a variety of directories,

indexes and encyclopedias that cover many business topics. They

also have other resources, such as



     *     Trade association information

           Ask the librarian to show you a directory of trade

           associations. Associations provide a valuable network

           of resources to their members through publications 

           and services such as newsletters, conferences and

           seminars.



     *     Books

           Many guidebooks, textbooks and manuals on small

           business are published annually. To find the names of

           books not in your local library check Books In Print,

           a directory of books currently available from

           publishers.



     *     Magazine and newspaper articles

           Business and professional magazines provide 

           information that is more current than that found in

           books and textbooks. There are a number of indexes to

           help you find specific articles in periodicals.



     *     Internet Search Engines



In addition to books and magazines, many libraries offer free

workshops, free access to computers and the Internet, lend 

skill-building tapes and have catalogues and brochures 

describing continuing education opportunities.

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