Product :: Promotion :: Price :: Place Pricing Introduction 1 Basic Term and Concepts What is a price ?

Product :: Promotion :: Price :: Place Imagine you want to buy some chocolate. Which of these will you buy? Why did you choose that product? Broken chocolate bar pieces from the bulk food store. Price: $1 for about 2 bars Widely available chocolate bars. Price: $1 each GODIVA chocolates – considered by many to be “the best” Price: $20 for a small box of about 12 chocolates Toblerone bars. Price: $6.99 for a large “gift size” bar.

Product :: Promotion :: Price :: Place Imagine you are going to buy a car. Which of these will you buy? Why did you choose that product. Audi TT – a cool design featured in several movies. Price: $60,000 A sporty and economical new Toyota Echo Price: $15, used Datsun Price: $600 Lamborghini Gallardo – often mentioned in rap songs. Price: $250,000

Product :: Promotion :: Price :: Place Imagine you are going to buy ketchup. Which of these will you buy? Why? Hunt’s Ketchup Price: $1.99 Heinz Ketchup Price: $3.50 Annie’s Organic Ketchup Price: $4.50

Product :: Promotion :: Price :: Place Definition: The amount of money asked for or given in exchange for something else. It is an arbitrary amount determined by marketers/sellers. PRICE = VALUE What is a price?

Product :: Promotion :: Price :: Place What factors influence price? Overall consumer demand Convenience of the location Status and image (product positioning) Trends in the world or the community Competition in that market Perceived quality of the product Pricing laws Cost to make and sell it Marketing boards How much the target customer will spend for it Profit that a company wants to make How much a company wants to sell of the product How quickly they want/need to sell the product

Product :: Promotion :: Price :: Place A few factors in more detail… Laws –It is in the best interest of our society to have fair competition in every marketplace. –To protect the consumer and encourage competition, there are laws against price fixing/collusion –Deceptive pricing practices Double ticketing Bait and switch False sale prices –MSRP = Manufacturer’s Suggested Retail Price

Product :: Promotion :: Price :: Place Competition Forces sellers of the same or similar products to remain reasonably close to one another in product pricing Affected by modern practice of price- checking/comparisons using various websites

Product :: Promotion :: Price :: Place Product positioning- pricing based on how you want to position your product or service. Possible positioning strategies… Premium pricing Discount pricing

Product :: Promotion :: Price :: Place Consumer Demand How much are consumers willing to pay? Consumers will often pay more when the demand is based on emotion/want rather than any rational need Always easier to reduce prices, very hard to increase prices. Price Sensitivity: When demand is strongly tied to the price and will fluctuate as the price changes. When prices go up, demand drops

Product :: Promotion :: Price :: Place Marketing Boards Promote their commodity Provide marketing info to producer-members Fund production and marketing research Some set the prices, a few limit production Membership organizations

Product :: Promotion :: Price :: Place DETERMINING THE PRICE Important Terms MARKUP % ie. for a $20 item, if customer pays $30 ($10 markup): markup10 –––––– = ––– = 50% cost to retailer 20

Product :: Promotion :: Price :: Place DETERMINING THE PRICE Important Terms MARGIN % The percentage of the price charged for the item which is not used to pay for the cost of the item

Product :: Promotion :: Price :: Place DETERMINING THE PRICE MARGIN % ie. for a $20 item, if customer pays $30 ($10 markup): markup10 ––––––––– = –– = 33.3% selling price 30 NOTE: The term “margin” used on its own simply means the difference between selling price and cost per unit (markup) e.g. $30 - $20

Product :: Promotion :: Price :: Place DETERMINING THE PRICE PROFIT Money left over after all expenses have been paid. all business profit = revenue - expenses

Product :: Promotion :: Price :: Place BREAK-EVEN ANALYSIS The first step in calculating price is to calculate how many items need to be sold at a given price to cover costs. Break- even analysis calculates the break-even point, the point at which profit starts.

Product :: Promotion :: Price :: Place BREAK-EVEN ANALYSIS Variable Costs –costs directly dependent on the quantity of good/services sold ie. a hairstylist uses 30¢ of shampoo on each client (more clients means more shampoo used)

Product :: Promotion :: Price :: Place BREAK-EVEN ANALYSIS Fixed Costs –costs which are constant, regardless of products or other variables –usually remain the same for an extended period of time –rent, salaries, utilities, etc.

Product :: Promotion :: Price :: Place BREAK-EVEN ANALYSIS Gross Profit –the selling price minus the variable costs of making that unit –money left over after variable costs have been paid

Product :: Promotion :: Price :: Place BREAK-EVEN POINT The number of units that need to be sold to cover costs BEP = fixed costs ÷ gross profit

Product :: Promotion :: Price :: Place BREAK-EVEN POINT Example: Var. costs for making bear: $3 per bear Selling price: $18Fixed cost: $150,000 GP = SP – VC GP = 18 – 3 = 15 BEP = fixed costs ÷ gross profit per unit BEP = 150,000 ÷ 15 = 10,000

Product :: Promotion :: Price :: Place BREAK-EVEN POINT Is this viable? If not, they can: ↓ variable costs to ↑ gross profit (and lower BEP) ↑ selling price to ↑ gross profit (and lower BEP)

Product :: Promotion :: Price :: Place BREAK-EVEN POINT ↓ selling price, ↑ demand, higher sales = reach the BEP sooner ↑ sales costs (ads, promos) to try to ↑ demand, resulting in ↑ sales = reach the BEP sooner ↓ fixed costs to reduce BEP

Product :: Promotion :: Price :: Place Fixed costCost for oneAmt madeTotal costCost/item Economies of scale: the more product you create, the lower the cost for each item.

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Developing products for Private-Label companies –cheaper than brand name –store and manufacturer sign contract for amount to be made –only cost to manufacturer is VC

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Developing products for Private-Label companies –FC are high, but have already been paid –WIN-WIN: store gets product, manufacturer gets profit

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Developing products for Private-Label companies How it works MONTUEWEDTHUFRI MC PC GV OC

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Creating a Barrier to Entry for Competitors –first company to sell a product may keep price high to reach the BEP sooner, but other companies enter market at lower price because their R&D is lower

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Creating a Barrier to Entry for Competitors –original marketer prices the product low to stimulate sales, reducing fixed costs quickly, and making entry unattractive for competitors

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Creating New Brands –if new product can be made using the same machinery, you can expand product line and increase sales without increasing costs = increased profit

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Merging with Competitors –joining with competitors: merger – voluntary/friendly takeover – forced –usual result is reduction in fixed costs (less duplication of things like HR, R and D)

Product :: Promotion :: Price :: Place ECONOMIES OF SCALE Merging with Competitors –more efficiency: less employees, lower operating costs –staff reduction sometimes lowers consumer confidence, and decreases sales

Product :: Promotion :: Price :: Place DISECONOMIES OF SCALE There is a point at which the economies of scale become diseconomies. –over-expansion leads to centralized management: lose touch with local markets

Product :: Promotion :: Price :: Place DISECONOMIES OF SCALE –combined production for more efficiency: no backup if machinery breaks –fewer employees: everyone works more, reduced trust, more sick time –large company creates communication problems: errors, drop in efficiency

Product :: Promotion :: Price :: Place REVIEW SO FAR What is: 1.Markup 2.Margin 3.Profit 4.Fixed costs 5.Variable costs 6.Gross profit 7.BEP formula

Product :: Promotion :: Price :: Place REVIEW (some questions to ponder) What do the following short forms mean? SP VC GP FC BEP What is the difference between the formula for margin and markup? What is the formula for BEP?