Transcript Unit 7 - ClassNet

PAUSE FOR THOUGHT
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Think of something you
recently purchased. How
much did it cost? What
are some of the things
that contribute to the
product’s price?
PRICING
DETERMINING THE PRICE
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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DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
Expectations:
• HMV expects customers to pay
$29.99 plus taxes to own DVD
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DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• customers expect to pay
$29.99 plus taxes to own DVD,
since most cost that amount
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• HMV paid less than $29.99 for
the DVD, added an amount to
get to that figure – markup
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
Expectations:
• HMV uses the markup for
salaries, rent, other expenses–
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margin
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• HMV gets to keep the money
left after all expenses have
been paid – profit
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• The DVD costs the
manufacturer less to make
than what they charge HMV
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• The manufacturer uses that
money to pay for factory,
materials, salaries...
DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
Expectations:
• Money left over is theirs to
keep (profit)
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DETERMINING THE PRICE
The HMV Scenario
HMV charges $29.99 for a DVD
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Expectations:
• The makers of the materials
used in DVD production sell
items for more than they cost
DETERMINING THE PRICE
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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...
DETERMINING THE PRICE
Important Terms
MARKUP
A percentage of the cost of an
item added to cover expenses and
make a profit
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DETERMINING THE PRICE
Important Terms
MARKUP
ie. for a $20 item, if customer
pays $30 ($10 markup):
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markup
10
cost to retailer
20
–––––– = % ––– = 50%
DETERMINING THE PRICE
Important Terms
MARGIN
The percentage of the price
charged for the item which is not
used to pay for the cost of the
item
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DETERMINING THE PRICE
Important Terms
MARGIN
ie. for a $20 item, if customer
pays $30 ($10 markup):
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markup
10
selling price
30
––––––––– = % ––– = 33.3%
DETERMINING THE PRICE
Important Terms
PROFIT
Money left over after all expenses
have been paid.
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business
profit = markup expenses
BREAK-EVEN ANALYSIS
The 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 ANALYSIS
Variable Costs
• costs directly dependent on
the quantity of good/services
sold
ie. a hairstylist uses 30¢ of
shampoo on each client (more
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clients means more shampoo used)
BREAK-EVEN ANALYSIS
Fixed Costs
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• costs which are constant,
regardless of products or other
variables
• usually remain the same for an
extended period of time
• rent, salaries, utilities, etc.
BREAK-EVEN ANALYSIS
Gross Profit
• the selling price minus the
variable costs
• money left over after variable
costs have been paid
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BREAK-EVEN POINT
The number of units that need to
be sold to cover costs
BEP = fixed costs ÷ gross profit
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(leave half a page for diagram from
the top of page 249)
BREAK-EVEN POINT
In the example from the text:
Var. costs for making bear: $3 per bear
Selling price: $18 Fixed cost: $150,000
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GP = SP – VC
GP = 18 – 3 = 15
BEP = fixed costs ÷ gross profit
BEP = 150,000 ÷ 15 = 10,000
BREAK-EVEN POINT
Is 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 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 SCALE
Economy of scale: the more
product you create, the lower the
cost for each item.
Fixed cost Cost for one Amt made
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Total cost
Cost/item
1000
10
1
1010
1010
1000
10
100
2000
20
1000
10 1000 11000
11
ECONOMIES OF SCALE
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Developing 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
ECONOMIES OF SCALE
Developing products for
Private-Label companies
• FC are high, but have already
been paid
• WIN-WIN: store gets product,
manufacturer gets profit
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ECONOMIES OF SCALE
Developing products for
Private-Label companies
How it works
MON
TUE
WED
THU
FRI
GV
MC
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PC
OC
ECONOMIES OF SCALE
Creating a Barrier to Entry
for Competitors
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• 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
ECONOMIES OF SCALE
Creating a Barrier to Entry
for Competitors
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• original marketer prices the
product low to stimulate sales,
reducing fixed costs quickly,
and making entry unattractive
for competitors
ECONOMIES OF SCALE
Creating New Brands
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• 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
ECONOMIES OF SCALE
Merging with Competitors
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• joining with competitors:
• merger – voluntary/friendly
• takeover – forced
• usual result is reduction in
fixed costs (less duplication in
)
ECONOMIES OF SCALE
Merging with Competitors
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• more efficiency: less
employees, lower operating
costs
• staff reduction sometimes
lowers consumer confidence,
and decreases sales
DISECONOMIES OF SCALE
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 SCALE
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• 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
REVIEW SO FAR
What is:
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1.
2.
3.
4.
5.
6.
7.
Markup
Margin
Profit
Fixed costs
Variable costs
Gross profit
BEP formula
REVIEW
What do the following short forms
mean? SP VC GP FC BEP
What is the difference between
the formula for margin and
markup?
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What is the formula for BEP?
Additional Factors
Affecting Price
Additional Factors Affecting Price
Laws
Under the Competition Act, Cdn
consumers are protected against:
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• price fixing: businesses cannot
decide together what to charge
• retail price maintenance: no
company can force a store to
charge a certain price
Additional Factors Affecting Price
Laws
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Under the Competition Act, Cdn
consumers are protected against:
• deceptive pricing
practices: double ticketing,
bait-and-switch pricing, false
sale prices
Additional Factors Affecting Price
as an aside (don’t copy)...
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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.
Additional Factors Affecting Price
Laws
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Marketing Boards
• promote commodity
• fund production and research
• regulate price paid by
consumers (for fruits, wheat,
livestock, vegetables, milk)
Additional Factors Affecting Price
Laws
Marketing Boards
• in certain cases control supply
(chicken, eggs, turkey, milk)—
you can only produce so much
(quota)
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Additional Factors Affecting Price
Product Positioning
Price is part of the product’s
image
• premium pricing: perception of
a luxury item
» watches, clothes, cars
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Additional Factors Affecting Price
Product Positioning
Price is part of the product’s
image
• discount pricing: selling
products at a cost lower than
what consumer expects
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Additional Factors Affecting Price
Consumer Demand
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• price set by figuring out how
much the consumer will pay
for an item
• at a certain price, demand will
decrease; customers seek
alternatives
Additional Factors Affecting Price
Consumer Demand
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• certain products are very
price sensitive; a small
change in price will create a
large change in demand
» movie theatres, fruits
and vegs
Additional Factors Affecting Price
Consumer Demand
• also impacted by competition;
if a competitor sells a product
similar to yours at a lower
price you have to follow
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• stores–like products–establish a
position in customers’ minds
PRICING STRATEGIES
PRICING STRATEGIES
A pricing strategy is a
plan to price a product to
achieve specific marketing
objectives.
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PRICING STRATEGIES
Market skimming
• with no competition, set the
price high
• reach BEP quickly
• reduce price once costs are
covered
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PRICING STRATEGIES
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 STRATEGIES
Market skimming
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› 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
PRICING STRATEGIES
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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PRICING STRATEGIES
Penetration Pricing
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• 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)
PRICING STRATEGIES
Penetration Pricing
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• 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
PRICING STRATEGIES
Penetration Pricing
• strategy should only be used
when variable costs are low
and one-time development
costs are high
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PRICING STRATEGIES
Competitive Pricing
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• most popular strategy
• products in a specific category
match/follow competitors closely
• companies compete using
something other than price: ads,
promos, distribution, product
features
PRICING STRATEGIES
Competitive 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)
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• simple for others to create a
product that offers more, same, or
less and justify their pricing
PRICING STRATEGIES
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
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Pricing Policies
PRICING POLICIES
• decisions individual businesses
make about how to best price
their product for the intended
market to achieve intended
results:
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• increased sales, and/or
• increased profitability
PRICING POLICIES
Leader Pricing
• generate traffic in the store
• offer great prices on a few key
items, encourage buyers to
purchase other products
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EXAMPLES: Deep discounts, big sale
prices, “door crasher specials”
PRICING POLICIES
Price Lining
• place all products with same
prices in the same place
• customers don’t have to price
compare
• store can earn higher profit
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EXAMPLES: CDs, printed t-shirts, “bargain
bins” where (diff) items are all same price
PRICING POLICIES
Everyday Low Prices
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• policy states that the store
offers the lowest price on all
products
• saves store time, advertising
• positive reputation for giving
customers better prices
EXAMPLES: WalMart, Zellers
PRICING POLICIES
Super Sizing
• creating the opportunity to
purchase a slightly larger
product for a bit less money
• price increase is mostly profit
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EXAMPLES: McDonalds. ‘Nuff said.
PRICING POLICIES
Super Sizing
12 oz drink: $ 1.09
20 oz drink: $ 1.69
8 extra oz: $ 0.60
Cost of pop: 0.5¢/oz
Cost of pop: .05¢/oz
Cost of pop: .05¢/oz
= 6¢
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= 10¢
= 4¢
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Cost of cup = 5¢
Cost of cup = 6¢
Cost of cup = 1¢
Profit = 98¢
Profit = 153¢
Profit = 55¢
Slide
= 891% profit
= 956% profit
= 1100% profit
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PRICING POLICIES
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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PRICING POLICIES
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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PRICING POLICIES
Combo Pricing (or Bundling)
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• 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
PRICING POLICIES
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 POLICIES
Return on Investment
(ROI)
• looking at overall revenue and
profit over a period of time
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• 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
PRICING POLICIES
Purchase Discounts
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• price reductions for larger
number purchased
• price reduction takes different
forms: free shipping, display
units, bonus items = reduce
the cost of doing business
PRICING POLICIES
Purchase Discounts
early payment discounts
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• 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
BELL 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?
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(prizes for table with most complete list)
PRICING FOR THE
INTERNATIONAL
MARKET
Pricing 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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Pricing for the Int’l Market
Tariffs
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- taxes levied by governments
on imported goods
- used to protect domestic
industries from low-priced
imports
- is it worth selling
internationally?
Pricing for the Int’l Market
Tariffs
Three types:
- most-favoured-nation (MFN)
tariffs (Canada has with most
countries)
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Pricing for the Int’l Market
Tariffs
Three types:
- preferential tariff rates (with
most important and most
needy trading partners)
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Pricing for the Int’l Market
Tariffs
Three types:
- general tariff rate (for all other
countries, set at 35% by World
Trade Organization)
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Pricing for the Int’l Market
ROOTS Cap
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$20 CDN
Pricing for the Int’l Market
ROOTS Cap in Australia
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$20 + 10.5% PTR = $22.10
Pricing for the Int’l Market
Transportation Costs
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- usually only two alternatives:
fast and expensive, slow and
inexpensive
- second alternative is cheaper
when using containerization
(big shipping containers)
Pricing for the Int’l Market
ROOTS Cap in Australia
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$20 + $2.10 PTR + $.25 shipping =
$22.35
Pricing for the Int’l Market
Currency Values
- fluctuations in currency values
need to be accounted for when
setting international prices
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Pricing for the Int’l Market
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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Pricing for the Int’l Market
ROOTS Cap in Australia
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($20 + $2.10 PTR + $.25 shipping)
x 1.23 exchange rate = $27.67
Pricing for the Int’l Market
Extra Charges
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- special insurance
- banking services (currency
exchange, etc.)
- special taxes on
transportation, airports, etc.
- packaging regulations