Transcript 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
Sales
with a __________
goal.
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
Profits
6 Steps to Setting a Price Strategy for
your Business
1.
2.
3.
4.
5.
6.
Select the pricing objective to decide where
you want to position your market offering.
Determine the demand.
Estimate the costs.
Analyze competitor costs, prices, offers and
possible reactions.
Select a pricing method.
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
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Variable costs

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Examples: taxes, rent or mortgage payments, equipment
payments or leases, wages and salaries, insurance, etc.
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.

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
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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?
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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.
$50 ÷ 144 = $0.35
$25 + $100 = $125
BP
= $125 ÷ $1.15 = 108.7
$1.50 - $0.35 = $1.15
Break-Even in Dollars

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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 strategy
Competitor prices
Cost of merchandise
Location of store
Location of store
When setting ticket prices for professional
baseball games, the organization
considers the team's
performance, 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 a
once-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.
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Cost Plus
Competition Based
Discounts and Allowances

Clearance/Closeout Markdowns
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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
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Prestige pricing
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setting prices in odd numbers just below an
even price, to make the price appear
considerably lower than it is.
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
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Multiple pricing
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Geographical pricing
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items are bundled together, such
as two for $5 rather than $2.50 per
item creating a sense of value
variations in price in different parts
of the world.
Segmentation Pricing
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offer the same basic product, but
add features that customers are
willing to pay for or remove.
Price Ceilings and Floors
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Price ceiling
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highest price that is allowed to be charged to
survive in an economy,
Price floor
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while the price floor is the lowest possible price
2 Types of Demand
 Demand

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)
__________
inelastic demand for tickets.
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 = $20,000
Unit selling price = $100
Unit variable cost = $60
BP = FC ÷ VCM
50000
Determine a firm's break-even point in units,
given the following information:
total fixed cost, $4,000
variable cost per unit, $20
selling price per unit, $100.
BP = FC ÷ VCM
50 units