BMI3C Unit 7 Slide 1 PAUSE FOR THOUGHT Think of something you recently purchased. How much did it cost? What are some of the things that contribute to the product’s price?

PRICING

BMI3C Unit 7 Slide 3 DETERMINING THE PRICE Two key factors to determining the price of an item the cost of doing business the profit the company wants to make

BMI3C Unit 7 Slide 4 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: HMV expects customers to pay $29.99 plus taxes to own DVD

BMI3C Unit 7 Slide 5 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: customers expect to pay $29.99 plus taxes to own DVD, since most cost that amount

BMI3C Unit 7 Slide 6 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: HMV paid less than $29.99 for the DVD, added an amount to get to that figure – markup

BMI3C Unit 7 Slide 7 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: HMV uses the markup for salaries, rent, other expenses– margin

BMI3C Unit 7 Slide 8 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: HMV gets to keep the money left after all expenses have been paid – profit

BMI3C Unit 7 Slide 9 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: The DVD costs the manufacturer less to make than what they charge HMV

BMI3C Unit 7 Slide 10 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: The manufacturer uses that money to pay for factory, materials, salaries...

BMI3C Unit 7 Slide 11 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: Money left over is theirs to keep (profit)

BMI3C Unit 7 Slide 12 DETERMINING THE PRICE The HMV Scenario HMV charges $29.99 for a DVD Expectations: The makers of the materials used in DVD production sell items for more than they cost

BMI3C Unit 7 Slide 13 DETERMINING THE PRICE When price becomes part of the marketing mix, other things need to be taken into account: laws & pricing regulations competition’s pricing the positioning of the product consumer demand...

BMI3C Unit 7 Slide 14 DETERMINING THE PRICE Important Terms MARKUP A percentage of the cost of an item added to cover expenses and make a profit

BMI3C Unit 7 Slide 15 DETERMINING THE PRICE Important Terms MARKUP ie. for a $20 item, if customer pays $30 ($10 markup): markup 10 –––––– = %––– = 50% cost to retailer 20

BMI3C Unit 7 Slide 16 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

BMI3C Unit 7 Slide 17 DETERMINING THE PRICE Important Terms MARGIN ie. for a $20 item, if customer pays $30 ($10 markup): markup 10 ––––––––– = % ––– = 33.3% selling price 30

BMI3C Unit 7 Slide 18 DETERMINING THE PRICE Important Terms PROFIT Money left over after all expenses have been paid. business profit = markup - expenses

BMI3C Unit 7 Slide 19 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.

BMI3C Unit 7 Slide 20 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)

BMI3C Unit 7 Slide 21 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.

BMI3C Unit 7 Slide 22 BREAK-EVEN ANALYSIS Gross Profit the selling price minus the variable costs money left over after variable costs have been paid

BMI3C Unit 7 Slide 23 BREAK-EVEN POINT The number of units that need to be sold to cover costs BEP = fixed costs ÷ gross profit (leave half a page for diagram from the top of page 249)

BMI3C Unit 7 Slide 24 BREAK-EVEN POINT In the example from the text: 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 BEP = 150,000 ÷ 15 = 10,000

BMI3C Unit 7 Slide 25 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)

BMI3C Unit 7 Slide 26 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

BMI3C Unit 7 Slide 27 ECONOMIES OF SCALE Economy of scale: the more product you create, the lower the cost for each item. Fixed costCost for oneAmt madeTotal costCost/item

BMI3C Unit 7 Slide 28 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

BMI3C Unit 7 Slide 29 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

BMI3C Unit 7 Slide 30 ECONOMIES OF SCALE Developing products for Private-Label companies How it works MONTUEWEDTHUFRI MC PC GV OC

BMI3C Unit 7 Slide 31 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

BMI3C Unit 7 Slide 32 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

BMI3C Unit 7 Slide 33 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 EXAMPLE: Kingston memory sticks

BMI3C Unit 7 Slide 34 ECONOMIES OF SCALE Merging with Competitors joining with competitors: merger – voluntary/friendly takeover – forced usual result is reduction in fixed costs (less duplication in )

BMI3C Unit 7 Slide 35 ECONOMIES OF SCALE Merging with Competitors more efficiency: less employees, lower operating costs staff reduction sometimes lowers consumer confidence, and decreases sales

BMI3C Unit 7 Slide 36 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

BMI3C Unit 7 Slide 37 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

BMI3C Unit 7 Slide 38 REVIEW SO FAR What is: 1.Markup 2.Margin 3.Profit 4.Fixed costs 5.Variable costs 6.Gross profit 7.BEP formula

BMI3C Unit 7 Slide 39 REVIEW 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?

Additional Factors Affecting Price

BMI3C Unit 7 Slide 41 Additional Factors Affecting Price Laws Under the Competition Act, Cdn consumers are protected against: price fixing: businesses cannot decide together what to charge retail price maintenance: no company can force a store to charge a certain price

BMI3C Unit 7 Slide 42 Additional Factors Affecting Price Laws Under the Competition Act, Cdn consumers are protected against: deceptive pricing practices: double ticketing, bait-and-switch pricing, false sale prices

BMI3C Unit 7 Slide 43 Additional Factors Affecting Price as an aside (don’t copy)... the manufacturers suggested retail price (MSRP) is what the manufacturer wants the retailer to charge, but they cannot force it. Some manufacturers refuse to deal with stores that want to set their own price, but that’s illegal.

BMI3C Unit 7 Slide 44 Additional Factors Affecting Price Laws Marketing Boards promote commodity fund production and research regulate price paid by consumers (for fruits, wheat, livestock, vegetables, milk)

BMI3C Unit 7 Slide 45 Additional Factors Affecting Price Laws Marketing Boards in certain cases control supply (chicken, eggs, turkey, milk)— you can only produce so much (quota)

BMI3C Unit 7 Slide 46 Additional Factors Affecting Price Product Positioning Price is part of the product’s image premium pricing: perception of a luxury item » watches, clothes, cars

BMI3C Unit 7 Slide 47 Additional Factors Affecting Price Product Positioning Price is part of the product’s image discount pricing: selling products at a cost lower than what consumer expects

BMI3C Unit 7 Slide 48 Additional Factors Affecting Price Consumer Demand price set by figuring out how much the consumer will pay for an item at a certain price, demand will decrease; customers seek alternatives

BMI3C Unit 7 Slide 49 Additional Factors Affecting Price Consumer Demand certain products are very price sensitive; a small change in price will create a large change in demand » movie theatres, fruits and vegs

BMI3C Unit 7 Slide 50 Additional Factors Affecting Price Consumer Demand also impacted by competition; if a competitor sells a product similar to yours at a lower price you have to follow stores–like products–establish a position in customers’ minds

PRICING STRATEGIES

BMI3C Unit 7 Slide 52 PRICING STRATEGIES A pricing strategy is a plan to price a product to achieve specific marketing objectives.

BMI3C Unit 7 Slide 53 PRICING STRATEGIES Market skimming with no competition, set the price high reach BEP quickly reduce price once costs are covered

BMI3C Unit 7 Slide 54 PRICING STRATEGIES Market skimming Some big weaknesses! ›If you do not recoup costs before competition enters, you could be at a disadvantage

BMI3C Unit 7 Slide 55 PRICING STRATEGIES Market skimming ›competition benefits from: ◦ R&D (1st company did it) ◦ consumer awareness (first company paid for ads) ◦ distribution methods (set up by 1st co.) ˆcompetition can charge less

BMI3C Unit 7 Slide 56 PRICING STRATEGIES Market skimming sometimes used to limit demand if you cannot produce enough to meet heavy demand initial high price attracts wealthy trendsetters

BMI3C Unit 7 Slide 57 PRICING STRATEGIES Penetration Pricing initially set a low price to attract customers very risky set price at a competitive level, even without competitors competition will need to meet or beat price (which may take time, delay entry)

BMI3C Unit 7 Slide 58 PRICING STRATEGIES Penetration Pricing costs will be quickly recouped because of demand lower price encourages customers to buy rather than wait, product is more easily positioned, top-of-the-mind awareness held longer

BMI3C Unit 7 Slide 59 PRICING STRATEGIES Penetration Pricing strategy should only be used when variable costs are low and one-time development costs are high

BMI3C Unit 7 Slide 60 PRICING STRATEGIES Competitive Pricing most popular strategy products in a specific category match/follow competitors closely companies compete using something other than price: ads, promos, distribution, product features

BMI3C Unit 7 Slide 61 PRICING STRATEGIES Competitive Pricing manufacturer with largest market share, first product, or longest on market sets benchmark price others compare their product, set their price in relation (remember costs vs benefits = value) simple for others to create a product that offers more, same, or less and justify their pricing

BMI3C Unit 7 Slide 62 PRICING STRATEGIES Competitive Pricing some retailers have a strict competitive price policy and will meet or beat others’ prices some stores hire competitive shoppers who research the competition to ensure best price

Pricing Policies

BMI3C Unit 7 Slide 64 PRICING POLICIES decisions individual businesses make about how to best price their product for the intended market to achieve intended results: increased sales, and/or increased profitability

BMI3C Unit 7 Slide 65 PRICING POLICIES Leader Pricing generate traffic in the store offer great prices on a few key items, encourage buyers to purchase other products EXAMPLES: Deep discounts, big sale prices, “door crasher specials”

BMI3C Unit 7 Slide 66 PRICING POLICIES Price Lining place all products with same prices in the same place customers don’t have to price compare store can earn higher profit EXAMPLES: CDs, printed t-shirts, “bargain bins” where (diff) items are all same price

BMI3C Unit 7 Slide 67 PRICING POLICIES Everyday Low Prices policy states that the store offers the lowest price on all products saves store time, advertising positive reputation for giving customers better prices EXAMPLES: WalMart, Zellers

BMI3C Unit 7 Slide 68 PRICING POLICIES Super Sizing creating the opportunity to purchase a slightly larger product for a bit less money price increase is mostly profit EXAMPLES: McDonalds. ‘Nuff said.

BMI3C Unit 7 Slide 69 PRICING POLICIES Super Sizing 12 oz drink: $ 1.09 Cost of pop: 0.5¢/oz = 6¢ Cost of cup = 5¢ Profit = 98¢ = 891% profit 20 oz drink: $ 1.69 Cost of pop:.05¢/oz = 10¢ Cost of cup = 6¢ Profit = 153¢ = 956% profit 8 extra oz: $ 0.60 Cost of pop:.05¢/oz = 4¢ Cost of cup = 1¢ Profit = 55¢ = 1100% profit

BMI3C Unit 7 Slide 70 PRICING POLICIES Negotiated Pricing buyer makes a purchase offer, seller makes offer to sell at lower than published price most commonly done with cars, houses

BMI3C Unit 7 Slide 71 PRICING POLICIES Interest-Free Pricing allow customer to purchase a product and to defer payment with no interest store makes arrangement with a financial company to collect

BMI3C Unit 7 Slide 72 PRICING POLICIES Combo Pricing (or Bundling) offering a discount on a product, so long as the consumer buys several in a package profit on non-discounted products make up for profit lost on discounted product

BMI3C Unit 7 Slide 73 PRICING POLICIES Psychological Pricing uses consumer behaviour to set pricing consumers may not pay $100 for a product, but since $99.99 is less than $100 it’s a deal

BMI3C Unit 7 Slide 74 PRICING POLICIES Return on Investment (ROI) looking at overall revenue and profit over a period of time eg. store buys $50,000 of goods with 90 days to pay, sells goods in 30 days, has 60 days to use (invest) money before paying

BMI3C Unit 7 Slide 75 PRICING POLICIES Purchase Discounts price reductions for larger number purchased price reduction takes different forms: free shipping, display units, bonus items = reduce the cost of doing business

BMI3C Unit 7 Slide 76 PRICING POLICIES Purchase Discounts early payment discounts used to encourage buyers to pay sooner than payment is due (usually 30, 60 days) ie. 2% if paid in 10 days company gets money faster

BMI3C Unit 7 Slide 77 BELL WORK You make cotton t-shirts in Cambridge. You want to sell your shirts in Brazil. Besides production, what are all the things you need to factor when calculating your cost? (prizes for table with most complete list)

PRICING FOR THE INTERNATIONAL MARKET

BMI3C Unit 7 Slide 79 Pricing for the Int’l Market Setting a price for a product in the international market is difficult. Things to consider: tariffs, transportation costs, currency values, extra charges

BMI3C Unit 7 Slide 80 Pricing for the Int’l Market Tariffs -taxes levied by governments on imported goods -used to protect domestic industries from low-priced imports -is it worth selling internationally?

BMI3C Unit 7 Slide 81 Pricing for the Int’l Market Tariffs Three types: -most-favoured-nation (MFN) tariffs (Canada has with most countries)

BMI3C Unit 7 Slide 82 Pricing for the Int’l Market Tariffs Three types: -preferential tariff rates (with most important and most needy trading partners)

BMI3C Unit 7 Slide 83 Pricing for the Int’l Market Tariffs Three types: -general tariff rate (for all other countries, set at 35% by World Trade Organization)

BMI3C Unit 7 Slide 84 Pricing for the Int’l Market ROOTS Cap $20 CDN

BMI3C Unit 7 Slide 85 Pricing for the Int’l Market ROOTS Cap in Australia $ % PTR = $22.10

BMI3C Unit 7 Slide 86 Pricing for the Int’l Market Transportation Costs -usually only two alternatives: fast and expensive, slow and inexpensive -second alternative is cheaper when using containerization (big shipping containers)

BMI3C Unit 7 Slide 87 Pricing for the Int’l Market ROOTS Cap in Australia $20 + $2.10 PTR + $.25 shipping = $22.35

BMI3C Unit 7 Slide 88 Pricing for the Int’l Market Currency Values -fluctuations in currency values need to be accounted for when setting international prices

BMI3C Unit 7 Slide 89 Pricing for the Int’l Market The final cost for a product in a foreign country—including the tariff, shipping cost, and currency exchange—is called the landed cost.

BMI3C Unit 7 Slide 90 Pricing for the Int’l Market ROOTS Cap in Australia ($20 + $2.10 PTR + $.25 shipping) x 1.23 exchange rate = $27.67

BMI3C Unit 7 Slide 91 Pricing for the Int’l Market Extra Charges -special insurance -banking services (currency exchange, etc.) -special taxes on transportation, airports, etc. -packaging regulations

BMI3C Unit 7 Slide 92 PRICING REVIEW Work on quietly at your desks until 11:30 Pg 282, #1, 2, 3, 4, 6, 7, 8