Chapter 4: Marketing Applications

When a new retail store opens in your neighbourhood strip mall, you wonder whether it will still be running six months or a year from now. Do its owners know how much merchandise they have to sell to cover their costs? Will any money be left over to help grow the business?

While the numbers vary, approximately 15% of new companies in Canada go out of business in their first year of operations. This number rises to 38% by the third year and to a staggering 49% over the first five years (Fisher & Rueber, 2010). Why do so many new businesses fail? Economic conditions, the fierceness of competition, changing consumer tastes, or even changes in taxes all contribute to the problem, but one of the most common reasons businesses fail is poor tracking of their basic financial numbers.

So if you want your own business to succeed, you need to understand its financial side. You need to be able to answer questions like the following:

• How does the money leave the business through costs and expenses?
• How does the money come into the business through revenue, which is determined by both the price tags on the merchandise and the volume at which that merchandise sells?
• What is the minimum amount of revenue that is needed to cover the costs?
• What is the resulting profitability of the business?

When you buy an iPod, it is very important that the right price is set. The price should

• 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 iPod, and
• 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 while lowering 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.

In this chapter, 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.

Attribution

“Chapter 5 Marketing and Accounting Fundamentals” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.