BMI3C Unit 7 Slide 1 PAUSE FOR THOUGHT Think of something you recently purchased. How much did it...

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PAUSE FOR THOUGHTPAUSE FOR THOUGHT

Think of something you recently purchased. How much did it cost? What are some of the things that contribute to the product’s price?

PRICINGPRICING

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DETERMINING THE DETERMINING THE PRICEPRICE

Two key factors to determining the price of an item

•the cost of doing business

•the profit the company wants to make

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The HMV ScenarioHMV charges $29.99 for a DVD

Expectations:•HMV expects customers to

pay $29.99 plus taxes to own DVD

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Expectations:•customers expect to pay

$29.99 plus taxes to own DVD, since most cost that amount

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Expectations:•HMV paid less than $29.99

for the DVD, added an amount to get to that figure – markup

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Expectations:•HMV uses the markup for

salaries, rent, other expenses–margin

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Expectations:•HMV gets to keep the money

left after all expenses have been paid – profit

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Expectations:•The DVD costs the

manufacturer less to make than what they charge HMV

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Expectations:•The manufacturer uses that

money to pay for factory, materials, salaries...

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Expectations:•Money left over is theirs to

keep (profit)

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Expectations:•The makers of the

materials used in DVD production sell items for more than they cost

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When price becomes part of the marketing mix, other things need to be taken into account:

• laws & pricing regulations•competition’s pricing•the positioning of the

product•consumer demand...

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Important TermsMARKUPA percentage of the cost of an item added to cover expenses and make a profit

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Important TermsMARKUPie. for a $20 item, if customer pays $30 ($10 markup):

markup 10–––––– = % ––– = 50%

cost to retailer 20

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Important TermsMARGINThe percentage of the price charged for the item which is not used to pay for the cost of the item

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Important TermsMARGINie. for a $20 item, if customer pays $30 ($10 markup):

markup 10 ––––––––– = % ––– = 33.3% selling price 30

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Important TermsPROFITMoney left over after all expenses have been paid.

businessprofit = markup -

expenses

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BREAK-EVEN ANALYSISBREAK-EVEN ANALYSISThe first step in calculating price is to calculate how many items need to be sold at a given price to cover costs. Break-even analysis calculates the break-even point, the point at which profit starts.

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BREAK-EVEN ANALYSISBREAK-EVEN ANALYSIS

Variable Costs•costs directly dependent

on the quantity of good/services sold

ie. a hairstylist uses 30¢ of shampoo on each client (more clients means more shampoo used)

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Fixed Costs•costs which are constant,

regardless of products or other variables

•usually remain the same for an extended period of time

•rent, salaries, utilities, etc.

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Gross Profit•the selling price minus the

variable costs•money left over after

variable costs have been paid

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BREAK-EVEN POINTBREAK-EVEN POINTThe number of units that need to be sold to cover costs

BEP = fixed costs ÷ gross profit

(leave half a page for diagram from the top of page 249)

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BREAK-EVEN POINTBREAK-EVEN POINTIn the example from the text:Var. costs for making bear: $3 per bearSelling price: $18 Fixed cost: $150,000

GP = SP – VCGP = 18 – 3 = 15BEP = fixed costs ÷ gross profitBEP = 150,000 ÷ 15 = 10,000

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BREAK-EVEN POINTBREAK-EVEN POINTIs this viable? If not, they can:↓ variable costs to ↑ gross profit (and lower BEP)↑ selling price to ↑ gross profit (and lower BEP)

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BREAK-EVEN POINTBREAK-EVEN POINT↓ selling price, ↑ demand, higher sales = reach the BEP sooner↑ sales costs (ads, promos) to try to ↑ demand, resulting in ↑ sales = reach the BEP sooner↓ fixed costs to reduce BEP

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ECONOMIES OF SCALEECONOMIES OF SCALEEconomy of scale: the more product you create, the lower the cost for each item.

Fixed cost Cost for one Amt made Total cost Cost/item

1000 10 1 1010 10101000 10 100 2000 201000 10 1000 1100

011

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ECONOMIES OF SCALEECONOMIES OF SCALEDeveloping products for Private-Label companies

•cheaper than brand name•store and manufacturer

sign contract for amount to be made

•only cost to manufacturer is VC

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ECONOMIES OF SCALEECONOMIES OF SCALEDeveloping products forPrivate-Label companies

•FC are high, but have already been paid

•WIN-WIN: store gets product, manufacturer gets profit

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ECONOMIES OF SCALEECONOMIES OF SCALEDeveloping products forPrivate-Label companies

How it worksMON TUE WED THU FRI

MC

PC

GV

OC

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ECONOMIES OF SCALEECONOMIES OF SCALECreating a Barrier to Entry for Competitors

•first company to sell a product may keep price high to reach the BEP sooner, but other companies enter market at lower price because their R&D is lower

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ECONOMIES OF SCALEECONOMIES OF SCALE

Creating a Barrier to Entry for Competitors

•original marketer prices the product low to stimulate sales, reducing fixed costs quickly, and making entry unattractive for competitors

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Creating New Brands• if new product can be made

using the same machinery, you can expand product line and increase sales without increasing costs = increased profit

EXAMPLE: Kingston memory sticks

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ECONOMIES OF SCALEECONOMIES OF SCALEMerging with Competitors

• joining with competitors:•merger – voluntary/friendly•takeover – forced

•usual result is reduction in fixed costs (less duplication in

)

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Merging with Competitors•more efficiency: less

employees, lower operating costs

•staff reduction sometimes lowers consumer confidence, and decreases sales

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DISECONOMIES OF DISECONOMIES OF SCALESCALE

There is a point at which the economies of scale become diseconomies.

•over-expansion leads to centralized management: lose touch with local markets

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DISECONOMIES OF DISECONOMIES OF SCALESCALE

•combined production for more efficiency: no backup if machinery breaks

•fewer employees: everyone works more, reduced trust, more sick time

•large company creates communication problems: errors, drop in efficiency

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REVIEW SO FARREVIEW SO FARWhat is:

1. Markup2. Margin3. Profit4. Fixed costs5. Variable costs6. Gross profit7. BEP formula

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REVIEWREVIEWWhat do the following short forms mean? SP VC GP FC BEP

What is the difference between the formula for margin and markup?

What is the formula for BEP?

Additional Factors Additional Factors Affecting PriceAffecting Price

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Additional Factors Affecting PriceAdditional Factors Affecting Price

LawsUnder the Competition Act, Cdn consumers are protected against:

•price fixing: businesses cannot decide together what to charge

• retail price maintenance: no company can force a store to charge a certain price

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LawsUnder the Competition Act, Cdn consumers are protected against:

•deceptive pricing practices: double ticketing, bait-and-switch pricing, false sale prices

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as an aside (don’t copy)...

the manufacturers suggested retail price (MSRP) is what the manufacturer wants the retailer to charge, but they cannot force it. Some manufacturers refuse to deal with stores that want to set their own price, but that’s illegal.

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LawsMarketing Boards

•promote commodity•fund production and

research•regulate price paid by

consumers (for fruits, wheat, livestock, vegetables, milk)

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LawsMarketing Boards

•in certain cases control supply (chicken, eggs, turkey, milk)—you can only produce so much (quota)

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Product PositioningPrice is part of the product’s image

•premium pricing: perception of a luxury item

» watches, clothes, cars

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Product PositioningPrice is part of the product’s image

•discount pricing: selling products at a cost lower than what consumer expects

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Consumer Demand•price set by figuring out

how much the consumer will pay for an item

•at a certain price, demand will decrease; customers seek alternatives

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Consumer Demand•certain products are very price sensitive; a small change in price will create a large change in demand

» movie theatres, fruits and vegs

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Consumer Demand•also impacted by

competition; if a competitor sells a product similar to yours at a lower price you have to follow•stores–like products–establish a position in customers’ minds

PRICING STRATEGIESPRICING STRATEGIES

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A pricing strategy is a plan to price a product to achieve specific marketing objectives.

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Market skimming•with no competition, set

the price high•reach BEP quickly•reduce price once costs are covered

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Market skimming•Some big weaknesses!

› If you do not recoup costs before competition enters, you could be at a disadvantage

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PRICING STRATEGIESPRICING STRATEGIESMarket skimming

› competition benefits from:◦ R&D (1st company did it)◦ consumer awareness (first company paid for ads)

◦ distribution methods (set up by 1st co.) competition can charge less

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Market skimming•sometimes used to limit

demand if you cannot produce enough to meet heavy demand

•initial high price attracts wealthy trendsetters

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Penetration Pricing• initially set a low price to

attract customers• very risky• set price at a competitive level,

even without competitors• competition will need to meet

or beat price (which may take time, delay entry)

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PRICING STRATEGIESPRICING STRATEGIESPenetration Pricing

•costs will be quickly recouped because of demand

• lower price encourages customers to buy rather than wait, product is more easily positioned, top-of-the-mind awareness held longer

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Penetration Pricing•strategy should only be

used when variable costs are low and one-time development costs are high

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Competitive Pricing• most popular strategy• products in a specific

category match/follow competitors closely

• companies compete using something other than price: ads, promos, distribution, product features

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PRICING STRATEGIESPRICING STRATEGIESCompetitive Pricing

• manufacturer with largest market share, first product, or longest on market sets benchmark price

• others compare their product, set their price in relation (remember costs vs benefits = value)

• simple for others to create a product that offers more, same, or less and justify their pricing

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Competitive Pricing• some retailers have a strict

competitive price policy and will meet or beat others’ prices

• some stores hire competitive shoppers who research the competition to ensure best price

Pricing PoliciesPricing Policies

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PRICING POLICIESPRICING POLICIES•decisions individual

businesses make about how to best price their product for the intended market to achieve intended results:•increased sales, and/or•increased profitability

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PRICING POLICIESPRICING POLICIES

Leader Pricing•generate traffic in the store•offer great prices on a few

key items, encourage buyers to purchase other products

EXAMPLES: Deep discounts, big sale prices, “door crasher specials”

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PRICING POLICIESPRICING POLICIESPrice Lining

•place all products with same prices in the same place

•customers don’t have to price compare

•store can earn higher profit

EXAMPLES: CDs, printed t-shirts, “bargain bins” where (diff) items are all same price

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Everyday Low Prices•policy states that the store

offers the lowest price on all products

•saves store time, advertising•positive reputation for giving

customers better pricesEXAMPLES: WalMart, Zellers

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Super Sizing•creating the opportunity to

purchase a slightly larger product for a bit less money

•price increase is mostly profit

EXAMPLES: McDonalds. ‘Nuff said.

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Super Sizing

12 oz drink: $ 1.09

Cost of pop: 0.5¢/oz

= 6¢

Cost of cup = 5¢

Profit = 98¢

= 891% profit

20 oz drink: $ 1.69

Cost of pop: .05¢/oz

= 10¢

Cost of cup = 6¢

Profit = 153¢

= 956% profit

8 extra oz: $ 0.60

Cost of pop: .05¢/oz

= 4¢

Cost of cup = 1¢

Profit = 55¢

= 1100% profit

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Negotiated Pricing•buyer makes a purchase

offer, seller makes offer to sell at lower than published price

•most commonly done with cars, houses

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Interest-Free Pricing•allow customer to

purchase a product and to defer payment with no interest

•store makes arrangement with a financial company to collect

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Combo Pricing (or Bundling)

•offering a discount on a product, so long as the consumer buys several in a package

•profit on non-discounted products make up for profit lost on discounted product

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Psychological Pricing•uses consumer behaviour

to set pricing•consumers may not pay

$100 for a product, but since $99.99 is less than $100 it’s a deal

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PRICING POLICIESPRICING POLICIESReturn on Investment (ROI)

• looking at overall revenue and profit over a period of time•eg. store buys $50,000 of goods with 90 days to pay, sells goods in 30 days, has 60 days to use (invest) money before paying

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Purchase Discounts•price reductions for larger

number purchased•price reduction takes

different forms: free shipping, display units, bonus items = reduce the cost of doing business

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Purchase Discountsearly payment discounts

•used to encourage buyers to pay sooner than payment is due (usually 30, 60 days)

• ie. 2% if paid in 10 days•company gets money faster

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BELL WORKBELL WORK

You make cotton t-shirts in Cambridge. You want to sell your shirts in Brazil. Besides production, what are all the things you need to factor when calculating your cost?

(prizes for table with most complete list)

PRICING FOR THE PRICING FOR THE INTERNATIONAL INTERNATIONAL

MARKETMARKET

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Pricing for the Int’l MarketPricing for the Int’l Market

Setting a price for a product in the international market is difficult.

Things to consider: tariffs, transportation costs, currency values, extra charges

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Tariffs- taxes levied by governments

on imported goods- used to protect domestic

industries from low-priced imports- is it worth selling internationally?

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TariffsThree types:

- most-favoured-nation (MFN) tariffs (Canada has with most countries)

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TariffsThree types:

- preferential tariff rates (with most important and most needy trading partners)

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TariffsThree types:

- general tariff rate (for all other countries, set at 35% by World Trade Organization)

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ROOTS Cap$20 CDN

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ROOTS Cap in Australia$20 + 10.5% PTR = $22.10

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Transportation Costs- usually only two

alternatives: fast and expensive, slow and inexpensive

- second alternative is cheaper when using containerization (big shipping containers)

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ROOTS Cap in Australia$20 + $2.10 PTR + $.25 shipping = $22.35

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Currency Values- fluctuations in currency

values need to be accounted for when setting international prices

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The final cost for a product in a foreign country—including the tariff, shipping cost, and currency exchange—is called the landed cost.

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ROOTS Cap in Australia($20 + $2.10 PTR + $.25 shipping) x 1.23 exchange rate = $27.67

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Extra Charges- special insurance- banking services (currency

exchange, etc.)- special taxes on

transportation, airports, etc.

- packaging regulations

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BMI3C Unit 7 Slide 1 PAUSE FOR THOUGHT Think of something you recently purchased. How much did it...

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