OBJECTIVE 3.03 EMPLOY PRICING STRATEGIES TO

DETERMINE PRICES 

What is a pricing objective?

A goal that guides a business in setting the cost of a product or service to potential consumers.

A pricing objective underlies the pricing process for a product, and it should reflect a company's marketing, financial, strategic and product goals, as well as consumer price expectations and the levels of available stock and production resources.

A sporting event setting ticket prices based on potential customers' ability to pay is an example of a price Objective

When a hockey team sets its ticket prices so it can achieve its goal of increasing its fan base by five percent, the hockey team is establishing a price objective in conjunction with a __________ goal. Sales

Profits

A college athletic department sets the football ticket prices so that the organization earns income of $12 per ticket after covering expenses. This is an example of a price objective based on

6 Steps to Setting a Price Strategy for your Business

1. Select the pricing objective to decide where you want to position your market offering.

2. Determine the demand.

3. Estimate the costs.

4. Analyze competitor costs, prices, offers and possible reactions.

5. Select a pricing method.

6. Finally, select the price

A professional football team that increases ticket prices for next season because the team is on a winning streak is selecting a pricing strategy based on market

What Is the Break-Even Point?

A business reaches its break-even point when its total sales income at a given selling price equals its total costs.

Components of Break-Even

Costs Fixed costs

Examples: taxes, rent or mortgage payments, equipment payments or leases, wages and salaries, insurance, etc.

Variable costs Examples: cost of goods, promotional costs, sales tax,

raw materials, business travel,

Semi-variable costs -Vary to some extent in response to sales

Should be assigned as either fixed or variable for the purpose of calculating break-even

Components of Break-Even

Profit and loss A business does not make a profit until it has

passed the break-even point—when total sales revenues are greater than total costs.

What do sales beyond the break-even point provide to a business? Profit

Why Calculate Break-Even? Calculating the break-even point can serve a

number of purposes for a business. Setting Prices Relocation of Business Determining Capital Needs Offering Incentives

Break-Even in Units

Calculating break-even in units determines how many products a business must sell to break even.

Why do sportswear stores calculate break-even in units?

To determine how many products they must sell to break even

Calculating Break-Even

A basic formula for calculating break-even for a product is:

  BP = FC ÷ VCM

BP—break-even point FC—total fixed costs VCM—variable-cost margin

Variable-cost margin is calculated by subtracting variable costs per unit from the

selling price per unit.

How many hot dogs does vendor need to sell to break

even? The vendor’s fixed costs include a $25 license and $100 for equipment rental.

Variable costs are estimated to be $50 for twelve dozen (144) hot dogs and buns, as well as condiments.

The hot dogs will sell for $1.50 each.

$25 + $100 = $125 $50 ÷ 144 = $0.35 $1.50 - $0.35 = $1.15

BP = $125 ÷ $1.15 = 108.7

Break-Even in Dollars

Break-even can also be expressed in dollars: After you calculate the number of units you

need to sell to break even (109 for the hot dog vendor), multiply that number by the selling price per unit ($1.50 for each hot dog).

This figure is the total dollar sales you need to make to break even.

In the case of the hot dog vendor, s/he needs to make $163.50 in sales to break even:

109 × $1.50 = $163.50

1. Choose a sport product

2. Write a rationale for the pricing objectives that you have for your sport product.

3. Describe considerations that you made in setting those objectives.

4. Obtain the financial information necessary to calculate the break-even point for a your chosed sport/event product in units and in

dollars

Which of the following is the least important factor when selecting a pricing

strategy:

Promotional strategyCompetitor prices

Cost of merchandiseLocation of store

Location of store

When setting ticket prices for professional baseball games, the organization

considers the team'sperformance, which is a(n) __________

factor.

situational

A business purchases a line of items for resale that cost $12.32 each. Expenses total $1.65 per

item.

What is the break-even price per item?

$13.97

A business decides to produce 10,000 football cushions and sell them for $5.00

each. They cost the company$3.00 each to produce.

How many cushions must the company sell to break even?

6,000

Why would an event marketer promote an upcoming celebrity golf tournament at an

exclusive course as aonce-in-a-lifetime event?

To generate higher ticket prices

Pricing Strategies

Penetration pricing in the introductory stage of a new product's life cycle involves accepting a lower profit margin and pricing relatively low.

Price skimming involves setting the price relatively high to generate a high profit margin. Premium product generally supports a

skimming strategy.

Product Mix Pricing Strategies

The product mix is the collection of products and services that a company chooses to offer its market.

Pricing strategies range from being the cost leader to being a high-value, luxury option for consumers.

Cost Plus Competition Based

Discounts and Allowances

Clearance/Closeout Markdowns to get rid of slow-moving, obsolete merchandise

Promotional Markdowns To increase sales and promote merchandise

If your goal is to avoid storing or discarding merchandise, what pricing strategy should you select?

Clearance/Closeout Markdowns

Psychological Pricing Strategies.

Odd-even pricing setting prices in odd numbers just below an

even price, to make the price appear considerably lower than it is.

Prestige pricing prices are inflated in order to create a

sense of greater value giving the impression that it is a better product.

Promotional pricing a price is temporarily lowered in order to

attract customers.

Psychological Pricing Strategies Multiple pricing

items are bundled together, such as two for $5 rather than $2.50 per item creating a sense of value

Geographical pricing variations in price in different parts

of the world.

Segmentation Pricing offer the same basic product, but

add features that customers are willing to pay for or remove.

Price Ceilings and Floors

Price ceiling highest price that is allowed to be charged to

survive in an economy, Price floor

while the price floor is the lowest possible price

2 Types of DemandDemand

elastic Demand that increases or decreases as

the price of an item goes down or up

inelastic A situation in which the demand for

a product does not increase or decrease correspondingly with a fall or rise in its price.

An increase in ticket prices is most accepted by fans if a sport has a(n) __________ demand for tickets.inelastic

Demand forecasting

Demand forecasting is estimating the quantity of a product or service that consumers will purchase and involves techniques including: informal methods

such as educated guesses quantitative methods

use of historical sales data or current data from test markets.

1. Choose a sport product

2. Write a rationale for the pricing objectives that you have for your sport product.

3. Describe considerations that you made in setting those objectives.

4. Obtain the financial information necessary to calculate the break-even point for a your

chosed sport/event product in units and in dollars

5. Write a rationale for the pricing strategoes that you have for your sport product.

A soccer camp provides five leaders at $8 per hour for eight hours a day for five days. If fringe benefits are 20% of the wages and supplies total $650, calculate the cost per person if 40 players attend.

$64.25

A product's selling price is $430 per unit, and the number of units required to reach the break-

even point is 2,100. Calculate the total dollar sales the business

needs to break even.

$903,000

Given the following information, calculate the break-even point in dollars:

Total fixed costs = $20,000Unit selling price = $100Unit variable cost = $60

BP = FC ÷ VCM

50000

Determine a firm's break-even point in units, given the following information:

total fixed cost, $4,000variable cost per unit, $20selling price per unit, $100.

BP = FC ÷ VCM

50 units