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 over
after all expenses are paid the
owner gets
To keep it
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:
Fixed Costs
1. For each meal sold at a restaurant, the cost of the
food might represent 25% of the cost-markup=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
Are constant and independent of sales
An increase in sales does not
have any effect on Fixed costs
Examples
1.
2.
3.
4.
5.
rent
insurance
salaries
utilities
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.
1. 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.
2.
3.
4.
develop no-name brand products
create barriers to entry
create new brands
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 to
consider fixed costs when
calculating the price for
It has already covered them
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 pose a You pass the savings in production efficiency onto the
significant barrier if
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 often
centralizes 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
2. supply
Price Positioning
1. premium
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 to
Remain close to one another
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
skimming to limit demand
because
The cant produce enough
List examples of products and
prices that reflect skimming:
these were actual prices at one
time
1.
2.
3.
4.
calculators-$399
vcr-$1500
dvd player-$800
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
Terms)
Price reductions for volume purchases or early 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
