9%2B-%2BPrice - Marketing (4) Marketing Price Price...

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Unformatted text preview: Marketing (4) Marketing Price Price & Promotion Price Price Price - 2nd of 4 Ps Customers will not buy your Customers product, unless they think the price is right the Price Price No magic formula for determining price. Begin with costs. Begin costs You MUST cover “Cost of Goods Sold” MUST Setting Price Setting If pizza costs $5.00 to make You must charge at least $5.01 You at Maybe more……? $ 5.02 ? $ 6.00 ? $12.00 ? Mark-Up Mark-Up Amount that a business adds to its “cost of goods” to arrive at its price Pizza costs $5.00 to make Pizza sells for $8.00 Cost of goods ($5) + mark-up ($3)= $8 Pricing Strategies Pricing NO formula which determines “price”. Size of “markup” is a policy decision. Two pricing strategies: “Skimming” and “Penetration” “Skimming” Strategy Set very HIGH price. Set HIGH High price > small market > low sales But, sales don’t have to be large But, don’t Large profits from each sale. Large each “Skimming” Strategy Examples of businesses that use Examples “skimming” strategy: “skimming” Rolls-Royce cars Mont Blanc pens Rolex watches ….others? “Penetration” Strategy Set LOW price Set LOW Low price > large market > high sales But, sales volume needs to be large But, needs Small profit from each sale Small each “Penetration” Strategy Examples of businesses that use Examples “penetration strategy: “penetration Honda Civic cars Bic pens Timex watches …..others? Pricing Strategy Pricing Problem: which pricing strategy to use? “Skimming”, “Penetration”, in between? To help answer: “Break-Even Analysis” Break-Even Analysis Break-Even Helps you understand relationship between selling price, costs, and number of units selling you must sell to make a profit you B/E = FC SP – VC SP . Break-Even Analysis - Costs Break-Even Businesses have 2 kinds of costs Variable Variable Costs (VC) Costs – increase with volume of activity volume “Cost of goods sold” is variable cost Break-Even Analysis - Costs Break-Even Businesses have 2 kinds of costs Fixed – Fixed Costs (FC) do not increase with not volume of activity “Operating Expenses” are a fixed cost Break-Even Analysis: Variable Costs Break-Even $$ $$ VC VC (straight line rising at $5 per pizza) $5 Volume of production Break-Even Analysis: Variable Costs Break-Even $$ $$ 1,000 pizzas = $5,000 1,000 VC VC 100 pizzas = $500 1 pizza = $5 Volume of production Break-Even Analysis: Fixed Costs Break-Even $$ $$ Fixed Costs (cost to run the Fixed business, e.g. rent, salaries) should not change as production goes not up. up. $100,000 FC FC Volume Volume 1 pizza pizza 100 pizzas 1000 pizzas Total Costs = Fixed + Variable Costs Total $$ $$ $100,000 + $500 $100,000 $100,000 + $5,000 $100,000 TC $100,000 + $5 $100,000 FC FC Volume Volume 1 pizza pizza 100 pizzas 1000 pizzas Selling Price Selling Remember - NO magic formula Remember NO One rule: Cover your cost of goods!! Cost to make pizza = $5 Selling price MUST be > $5 Selling Price Selling $$ $$ Slope of price line Slope steeper than VC steeper Price > VC Sales Sales VC Volume of production Selling Price Selling Because selling price (SP) greater Because than cost to make pizza (VC) than You make small profit from every sale But…. There are still the costs of running There the business (FC) the Selling Price Selling $$ $$ High Price (steep slope) High TC Lower Price Price FC FC 1 pizza pizza 100 pizzas 1000 pizzas Break-Even Analysis Break-Even If you know your costs – you can If choose a price. choose Break-Even Analysis tells you: the quantity you must sell in the order to make a profit order Break - Even Break B/E = FC SP – VC SP . # of Units to = Break Even Fixed Costs Contribution from each sale Break-Even For Pizza Business Break-Even Variable Cost (VC) = $5 per pizza Fixed Costs (FC) = $100,000 per year 3 Scenarios: “Skimming” deluxe, gourmet pizza = $15 “Penetration” econo-pizza = $6 Middle price pizza = $10 Middle Break – Even: Gourmet Break B/E = B/E = B/E FC ($100,000) SP – VC ($15 - $5) $100,000 $100,000 $10 $10 B/E = 10,000 pizzas / year Break – Even: Econo Break B/E = B/E = B/E FC ($100,000) SP – VC ($6 - $5) $100,000 $100,000 $1 $1 B/E = 100,000 pizzas / year Break – Even: Middle Break B/E = B/E = B/E FC ($100,000) SP – VC ($10 - $5) $100,000 $100,000 $5 $5 B/E = 20,000 pizzas / year Using Break-Even Analysis Using Ask yourself: “Can I sell this many pizzas?” “Should I raise my price, and sell less?” ...
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