CHAPTER 7 PRICING

7.1 DETERMINING THE PRICE 2 key factors that determine price: Cost of doing business Profit that a company hopes to make Break-Even Analysis How many units must be sold at a given price to cover costs

7.1 DETERMINING THE PRICE Variable costs Fixed costs Depend on the # of goods sold or services rendered Ex: Cost of shampoo a hairstylist needs depends on # of clients Fixed costs Constant, independent of sales or other variables Ex: rent, insurance, salaries, etc.

7.1 DETERMINING THE PRICE Gross Profit/Contribution Margin The selling price minus the variable cost Breakeven Point: Breakeven Point (BEP) = fixed costs / gross profit # of units that need to be sold to break even

7.1 DETERMINING THE PRICE Economies of Scale The more products a company makes, the lower the cost of production

7.1 DETERMINING THE PRICE FOUR pricing strategies dependent on economies of scale: 1. Developing Products for Private-Label Companies Same potato chips Brand name – higher price Store-brand name – lower price 2. Creating a Barrier to Entry (low pricing) 3. Creating New Brands 4. Merging with Competitors

7.1 DETERMINING THE PRICE Diseconomies of Scale Maximizing output does not always lead to lower cost Companies can become too large which may lead to inefficiencies in machinery and communications etc.

7.1 DETERMINING THE PRICE What are the 5 most common pricing mistakes?

5 MOST COMMON MISTAKES Price War – slashing prices because competitors are doesn't always work Lost Value – If a cost or service is not factored into a price Cost-Based Pricing – Better to have a markup based on the value received by the customer (not cost)

5 MOST COMMON MISTAKES Underpricing Your Service – May cause too much demand that cannot be met The Psychology of Price Image may dictate pricing Convenience for the consumer can be created (Ex: total comes to $5 rather than $5.09)

7.1 DETERMINING THE PRICE What are some fixed and variable costs of your daily life? What is the biggest problem with a business being too big?