Mathematics of Merchandising

When you buy a new cell phone, it is very important that the right price is set. The price that the cell phone is sold for needs to do several things, including:

• Be seen as fair by you the buyer.
• Pay for the costs (plastics, battery, buttons, circuit boards, headset) and expenses (employees, factory, electricity, distribution) of making the cell phone.
• Allow the seller’s business to make some extra money as profit so that it can grow its business further.

If your business is selling a product, you will need to pay close attention to price adjustments because they affect profitability. Various discounts, like putting items on sale, may increase sales but lower the amount of profit per transaction. How do you know where to set the balance to maximize profit overall?

As a student in a business program, consider this chapter essential to the success of any business. Whether your pricing strategy is high or low, the company must ensure that it can still pay its bills as a minimum requirement. And that requires careful juggling of many factors. If it fails to manage its pricing properly, the company will go bankrupt!

This chapter will make you a smarter business professional and a wiser consumer. You shop retail almost every day and regularly purchase goods and services. If you understand how product pricing works, you can make sense of “deals.” You can easily explain why the same product sells for two different prices at two different stores.

You must learn the language of marketers to perform merchandising mathematics involving product costs, expenses, prices, markups, markdowns, and ultimately profitability. Once the study of the various pricing components is complete, we will see how the various pieces of the pricing puzzle fit together into a cohesive merchandising environment.