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
