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Notes 8

This document discusses various pricing strategies and concepts. It defines key terms like margin, markup, variable costs, fixed costs, and break-even analysis. It explains how businesses use these concepts to determine appropriate pricing. Specifically, it covers three main pricing strategies: skimming, penetration, and competitive pricing. It also discusses factors that affect pricing like competition, demand, laws, and economics of scale.

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54 views

Notes 8

This document discusses various pricing strategies and concepts. It defines key terms like margin, markup, variable costs, fixed costs, and break-even analysis. It explains how businesses use these concepts to determine appropriate pricing. Specifically, it covers three main pricing strategies: skimming, penetration, and competitive pricing. It also discusses factors that affect pricing like competition, demand, laws, and economics of scale.

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© © All Rights Reserved
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Margin

The amount of money added to the cost of the


product

calculated how?

Price -cost

Example:

price= 100
cost=25
Margin=100-25=75

The $75 difference goes


towards

1. rent
2. salaries
3. other business expenses

Markup

1-(cost/price)

If theres any money left To keep it


over after all expenses are
paid the owner gets
Profit

Margin-fixed costs=profit

Break Even Analysis

Tells you: How many units/dollars must be sold in


order to cover operating costs

Break even analysis is the starting point of setting the actual price
Break Even Point

The number of units a business must sell to cover its


cost

Variable Costs

The cost that goes into selling each unit-(1-margin)

Examples:

1. For each meal sold at a restaurant, the cost of


the food might represent 25% of the costmarkup=75%

2. For a plumber, the cost of the material and


goods used to do a job might be 50% of what
they ultimately charge the customer
Fixed Costs

Are constant and independent of sales

An increase in sales does not have any effect on Fixed costs


Examples

1. rent
2. insurance
3. salaries
4. utilities
5. administrative costs

All businesses should determine their average fixed costs per day as well as their
average variable costs
All businesses should determine their average variable costs
Gross Profit=

Selling price variable costs

Gross margin=

1-variable cost %

Break Even=

Fixed costs/margin-Units
Fixed Costs/markuo-Dollars

Examples:

1. Restaurant:

Pizza price $10

Cost to make $3

Margin $7

Markup (1-(cost/price): 1-.3=.7 or 70%

70% of everything they sell is profit that goes


towards paying for fixed costs. Once the Fixed costs
are covered, the rest is profit.
2. Plumber:
1. Markup=50% (half of what they charge
goes towards paying the material)
2. Fixed cost per day=$200
3. B.E. = 200/.5=$400
Economies of Scale

The more products a company makes, the lower the


cost of production for each item.

The learning curve:

You get better and more efficient at a task with each


time you accomplish it, until you finally cant get
much better without using a new or better
tool/system

Things Economies of scale


can lead manufacturers to:

1. develop no-name brand products


2. create barriers to entry
3. create new brands
4. merge with competitors

Developing Products for


Private Label Companies

Private Label (store brand) products are made by the


same companies that make some of the other
products

Usually a lot

Cheaper

Manufacturers do not have It has already covered them


to consider fixed costs
when calculating the price
for non-branded chips
because
Barrier to Entry

Something that makes it difficult for competitors to


enter the market and compete against you

Economies of scale can


You pass the savings in production efficiency onto
pose a significant barrier if the customer
Skimming with a higher
price would only

Encourage competition

Creating new Brands

When not operating at 100% capacity, create a new


brand

Idle capacity:

When you have equipment, workers that are not


being used all the time. This is why many plants
operate 3 shifts. If youve got the building and the
equipment it is more profitable to keep producing
and selling, thus covering the fixed costs of that
equipment more quickly thus leading to more
profitability.

Merging with competitors Usually results in: reduction in fixed costs.


Greater efficiency often
means:

Less employees

Diseconomies of Scale

Although expansion can generate more profit, it


oftencentralizes management and causes
businesses to lose touch

Additional Factors Affecting Price

Laws to protect consumers


from:

1. Price Fixing=Group pricing


2. retail Price Maintenance
3. Deceptive Pricing Practices
1. Double ticketing
2. Bait and switch
3. False sale prices

MSRP

Manufacturers suggested retail price

Cannot legally be

enforced

Marketing boards play


important role in
marketing:

Commodities (unbranded products)

Some have the power to


control:

1. price

Price Positioning

1. premium

2. supply

2. discount
Consumer Demand

Its easier to start: high and lower

Not all products are


immune to

The effect of price increases

Competition: Forces sellers Remain close to one another


to
Internet access allows
consumers to

Find an assortment of prices for products all over the


world

If a business goes online

Its fixed costs are reduced substantially

What fixed costs can be


eliminated by having an
online store?

1. rent/mortgage
2. employees
3. advertising
4. inventory

Pricing Strategies

Pricing Strategy

3 pricing Strategies:

Plan too price a product to achieve a specific


marketing objective
1. skimming
2. penetration
3. competitive

Skimming

Setting an initially high price before competitors


enter the market

Capitalize on

Uniqueness

Good time to recover

R and D costs

Marketers sometimes use The cant produce enough


skimming to limit demand
because
List examples of products
and prices that reflect
skimming:
these were actual prices at
one time

1. calculators-$399
2. vcr-$1500
3. dvd player-$800
4. mp3 player-$600

7.4 Pricing Policies


Leader Pricing

Low price to generate traffic-door crasher specials

Price Lining

Puts all products at one price in one place

Everyday Low Prices

Example of store: Walmart

Super Sizing

Adding a low cost product to increase its selling


price

Negotiated Pricing

Offer and counter offer

Negotiated Prices

Examples:
1. cars
2. corporate stocks
3. houses

Interest Free Pricing

Allows consumers to own now and pay later

How does it work

Store sells contract to financial institution for a %

Combo Pricing/Bundling

Similar to supersizing, but discount price on one


item is part of package

Psychological Pricing

Tries to use knowledge of typical consumer


behaviour to forecast acceptable pricing

Return on Investment

Sell quickly, invest profits before having to pay for


goods

Purchase Discounts(buying Price reductions for volume purchases or early


Terms)
payment
Factors affecting price of
goods sold in other
countries

1. Tariffs
2. Transportation
3. currency
4. extra charges

Tariffs

Taxes used to protect domestic industries

Free trade

No tariffs

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