Transcript Determining the Price - FPSS

Determining the Price
Section 7.1
Determining the Price
There are two key factors that determine
price:
1.
2.
The cost of doing business
The profit the company hopes to make
from the sale of its product or service
Markup
 The
amount of money that a company
adds to the original cost of the product in
order to cover its business expenses and
to make a profit.
Ex. HMV buys a CD for $15 from the CD
manufacturer. It sells all CD’s in its store
with a $5 markup or
($5 ÷ $15 = 33.3% markup)
Margin/Profit
Margin
The percentage of the price charged to the
consumer that is not used to pay for the cost of
the item.
Profit
Money left over after all expenses are paid is
earned and be kept by the owners.
Ex. HMV buys the CD for $15 from the DVD
manufacturer and decides to sell it for $25. The
margin is (15 ÷ 25) x 100 = 60% Margin
Break-even Analysis
Break-even Analysis
Determining how many units must be sold at a
given price to cover operating costs
Variable Costs
Costs which are directly dependant on the quantity
of goods sold
Fixed Costs
Costs which stay the same regardless of how
many goods are produced or sold
Economies of Scale
 The
more products a company makes, the
lower the cost of production for each item.
Private-Label Products
 The
private-label or store brand (ie. no
name brand) of many products are
identical to the brand-named competitive
product it sits beside on the shelf.
Other Strategies using Economies of Scale
1.
2.
3.
Creating a barrier to entry for competitors
Creating new brands
Merging with Competitors
5 Most Common Pricing Mistakes
1.
The Price War: Slashing prices, just because the competition is
doing so, may not work to the company’s advantage.
2.
Lost value: If a cost or a service is not factored in when a price is
established, there may not be a way of recovering the cost.
3.
Cost-Based Pricing: Adding a markup to the cost of the good can
create a selling price that may be too high or not high enough.
4.
Underpricing Your Service: May increase business, but it may
cove at a cost if the increased demand cannot be met and makes
customers frustrated.
5.
The Psychology of Price: Image, not price, may dictate pricing.
Convenience for the consumer can be create by adjusting price
so that the total comes to $5.00 rather than $5.09.
Diseconomies of Scale
 Maximizing
the output of production does
not always lead to economies of scale.
 Occasionally, a firm will become too large.
Bureaucracy is often created in large firms
which slows down a company’s reaction
times and limits their creativity