ShmoopTube

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[Dino and Coop singing]

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When you walk through a store, you probably notice that different items have different

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prices.

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…or maybe you don't, and you just buy whatever color cereal box is the prettiest. [Row of cereal boxes in a supermarket]

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Hey, whatever works.

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But say you do notice the different prices…why are they different? [Jelly is scanned at a till]

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Where do these prices come from?

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It's not just someone in the backroom throwing darts at a dartboard.

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There are lots of things that affect the prices of goods and services, even if the dart thing [Darts being thrown at a dartboard with prices on them]

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would be easier and a bit more fun.

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So let's say you're starting a lemonade stand.

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You've got your stand set up, a fresh batch is in the pitcher, and you're ready to make [Kid walking to his lemonade stand]

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some sales.

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…Ooh…one issue….you haven't set a price.

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How much are you going to charge for each cup of lemonade? [Price sign has a question mark on it]

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Sure, you could use the pay-what-you-can model, but you might end up with a lot of clients

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who mysteriously can't pay anything more than a twig and a rock.

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And while a twig for a pitcher of lemonade is a pretty good bargain, it doesn't do you [Kid tries to pay with a stick in a shop]

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much good.

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One important thing to think about when setting a price is how much it costs to make the product.

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Whatever the cost of the product happens to be, you should be charging a bit more, so

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that you're actually making some money.

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After all, it's a business, not a lemonade-based charity.

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If we think about our lemonade stand, it might turn out that once we pay for sugar and lemons… [Ingredients for lemonade]

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…an entire pitcher costs us two dollars to make.

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And if we can get eight cups of lemonade from each pitcher, that means our cost per cup

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is $2 divided by eight, or 25¢. [Cups of lemonade laid out]

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Quarters might be nice and shiny, but if we only charge 25¢ per cup, we're going to end

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up with a grand total of zero dollars profit.

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So if you opened this stand for more than just the love of making lemonade, you'll want [Love hearts coming from boy at a non-profit lemonade stand]

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to charge more than 25¢ per cup.

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May we suggest one million dollars per cup? [People walk up to the stand]

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Which leads us to our next point…

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Another important thing to think about when setting a price is what a fair price would [Customers walk away]

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be.

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If we're selling lemonade, we don't just want our price to cover costs.

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We also want it to be something that people on our block could afford.

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So it might not be the best idea to set our price at $1,000,000 a cup. [Kid looks thoughtful]

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Unless everyone on your block happens to be a billionaire. [Oprah and Bill Gates at the lemonade stand]

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Finally, it's also worth thinking about your target goals.

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Let's say you set up this lemonade stand so that you could buy a pair of roller skates

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that cost $75.

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If you charge $1 per cup, you'll be making 75¢ profit per cup…

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…so once you sell one hundred cups, you and your precious roller skates can start

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your life together.

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However, if you charge 26¢ per cup, you'll only be making 1¢ profit per cup… [Workings written in a notebook]

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…which means you'll have to sell 7,500 cups to get those skates.

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And by the time you'd finally get those skates, you'd probably be a little more worried about [Old man rollerskating]

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retirement… [Old man falls over]

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