Transcript File

Product :: Promotion :: Price :: Place
Pricing Introduction 1
Basic Term
and Concepts
What is a
price?
Product :: Promotion :: Price :: Place
Imagine you want to buy some chocolate. Which of these will you buy?
Why did you choose that product?
Broken chocolate bar pieces
from the bulk food store.
Toblerone bars.
Price: $1 for about 2 bars
Price: $6.99 for a large
“gift size” bar.
GODIVA chocolates –
considered by many to
be “the best”
Widely available
chocolate bars.
Price: $1 each
Price: $20 for a small
box of about 12
chocolates
Product :: Promotion :: Price :: Place
Imagine you are going to buy a car. Which of these will you buy?
Why did you choose that product.
Lamborghini Gallardo –
often mentioned in rap
songs.
Audi TT – a cool design
featured in several movies.
Price: $250,000
Price: $60,000
A sporty and
economical new
Toyota Echo
Price: $15,000
1983 used
Datsun
Price: $600
Product :: Promotion :: Price :: Place
Imagine you are going to buy ketchup. Which of these will you buy?
Why?
Annie’s Organic Ketchup
Price: $4.50
Heinz Ketchup
Price: $3.50
Hunt’s Ketchup
Price: $1.99
Product :: Promotion :: Price :: Place
What is a price?
Definition:
The amount of money asked for or given
in exchange for something else.
It is an arbitrary amount determined by
marketers/sellers.
PRICE = VALUE
Product :: Promotion :: Price :: Place
What factors influence price?
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Overall consumer demand
Convenience of the location
Status and image (product positioning)
Trends in the world or the community
Competition in that market
Perceived quality of the product
Pricing laws
Cost to make and sell it
Marketing boards
How much the target customer will spend for it
Profit that a company wants to make
How much a company wants to sell of the product
How quickly they want/need to sell the product
Product :: Promotion :: Price :: Place
A few factors in more detail…
• Laws
– It is in the best interest of our society to have fair competition
in every marketplace.
– To protect the consumer and encourage competition, there
are laws against price fixing/collusion
– Deceptive pricing practices
• Double ticketing
• Bait and switch
• False sale prices
– MSRP = Manufacturer’s Suggested Retail Price
Product :: Promotion :: Price :: Place
Competition
• Forces sellers of the same or similar
products to remain reasonably close to
one another in product pricing
• Affected by modern practice of pricechecking/comparisons using various
websites
Product :: Promotion :: Price :: Place
Product positioning- pricing based on how
you want to position your product or
service. Possible positioning
strategies…
• Premium pricing
• Discount pricing
Product :: Promotion :: Price :: Place
Consumer Demand
• How much are consumers willing to pay?
• Consumers will often pay more when the
demand is based on emotion/want rather
than any rational need
• Always easier to reduce prices, very hard to
increase prices.
Price Sensitivity:
• When demand is strongly tied to the price
and will fluctuate as the price changes.
• When prices go up, demand drops
Product :: Promotion :: Price :: Place
Marketing Boards
• Promote their commodity
• Provide marketing info to producer-members
• Fund production and marketing research
• Some set the prices, a few limit production
• Membership organizations
Product :: Promotion :: Price :: Place
DETERMINING THE PRICE
•Important Terms
•MARKUP %
•ie. for a $20 item, if customer pays $30
($10 markup):
markup
–––––– =
cost to retailer
10
––– =
20
50%
Product :: Promotion :: Price :: Place
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
Product :: Promotion :: Price :: Place
DETERMINING THE PRICE
•MARGIN %
•ie. for a $20 item, if customer pays $30
($10 markup):
markup
10
––––––––– = –– = 33.3%
selling price 30
NOTE: The term “margin” used on its
own simply means the difference between
selling price and cost per unit (markup)
e.g. $30 - $20
Product :: Promotion :: Price :: Place
DETERMINING THE PRICE
•PROFIT
•Money left over after all expenses have
been paid.
profit = revenue -
all business
expenses
Product :: Promotion :: Price :: Place
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. Breakeven analysis calculates the break-even
point, the point at which profit starts.
Product :: Promotion :: Price :: Place
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
clients means more
shampoo used)
Product :: Promotion :: Price :: Place
BREAK-EVEN ANALYSIS
•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.
Product :: Promotion :: Price :: Place
BREAK-EVEN ANALYSIS
•Gross Profit
– the selling price minus the variable costs of
making that unit
– money left over after variable costs have
been paid
Product :: Promotion :: Price :: Place
BREAK-EVEN POINT
•The number of units that need to be sold
to cover costs
•BEP = fixed costs ÷ gross profit
Product :: Promotion :: Price :: Place
BREAK-EVEN POINT
•Example:
•Var. costs for making bear: $3 per bear
•Selling price: $18 Fixed cost: $150,000
•GP = SP – VC
•GP = 18 – 3 = 15
•BEP = fixed costs ÷ gross profit per unit
•BEP = 150,000 ÷ 15 = 10,000
Product :: Promotion :: Price :: Place
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)
Product :: Promotion :: Price :: Place
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
Product :: Promotion :: Price :: Place
•Economies 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
1010
1000
10
100
2000
20
1000
10 1000 11000
11
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•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
Product :: Promotion :: Price :: Place
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
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•Developing products for
•Private-Label companies
How it works
MON TUE WED THU FRI
GV
MC
PC
OC
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•Creating 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
Product :: Promotion :: Price :: Place
ECONOMIES 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
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•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
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•Merging with Competitors
– joining with competitors:
• merger – voluntary/friendly
• takeover – forced
– usual result is reduction in fixed costs (less
duplication of things like HR, R and D)
Product :: Promotion :: Price :: Place
ECONOMIES OF SCALE
•Merging with Competitors
– more efficiency: less employees, lower
operating costs
– staff reduction sometimes lowers consumer
confidence, and decreases sales
Product :: Promotion :: Price :: Place
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
Product :: Promotion :: Price :: Place
DISECONOMIES OF SCALE
– 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
Product :: Promotion :: Price :: Place
REVIEW SO FAR
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What is:
1.
2.
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6.
7.
Markup
Margin
Profit
Fixed costs
Variable costs
Gross profit
BEP formula
Product :: Promotion :: Price :: Place
REVIEW (some questions to
ponder)
•What 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?