Pricing a Product

Pricing in marketing The price of a product is determined by many things demand for the product where the business wants to be in the market cost of production with a Mark-up The ultimate goal is to set a price that will maximize PROFIT

Understanding the Profit Formula Profit is the amount of money that the owner of a business retains once all expenses are paid off. Profit is equal to Revenue – Expenses Revenue is the money generated by the sale of goods and/or services Expenses are the costs of doing business

Understanding the Profit Formula Revenue is generally calculated by multiplying price X units sold Expenses in general fall into two categories: Fixed costs – One time or infrequent purchases that do not change based on the number of units produced Variable costs – costs that change based on the number of units produced

Example of Expenses Here is a list of expenses for a lemonade stand: Beneath each item, please list whether the expense is a variable cost or a fixed cost lemonssugarstandpostersCups spoonjuicernapkinschairwater

Examples of profit Eg. Company sells a wooden toy for $20 each, the variable cost to make each toy is $4, the manufacturer had to buy a jigsaw for the project for $250. Assume the manufacturer makes the item made-to-order (ie. The number made is the same as the number sold) a) If the manufacturer sells 50 units, what is the profit? b) If the manufacturer sells 500, what is the profit? c) If the manufacturer sells 1000, what is the profit?

Examples of Profit SalesProfit (Sale Price X Quantity – Variable cost X Quantity – Fixed cost) 50 units 500 units 1000 units Complete the table below:

Break-even Analysis The Break-even point is the point at which a company will break even on sales That is revenue = expenses What is the break-even point from the last question? Answer:

Break-even point For break even analysis, the profit is set to zero: Profit = Revenue – Expenses 0 = $20 x Units - $4 X Units - $250 0 = $16 X Units - $250 $250 = $16 X Units $250 / $16 = Units = Units With break even we ALWAYS round up! Therefore, the breakeven is 16 units.

Try these 1. A company sells Product A for $20 each, they have a variable cost of $5 each and fixed costs of $5000. What is the break-even point? 2. A company sells Product B for $5 each, they have a variable cost of $4 each and fixed costs of $6000. What is the break-even point? 3. A company sells 400 units, and has variable costs of $350 per unit and fixed costs of $500. If they broke-even, what was the sales price?

Examples of Break even QuestionRevenue = Expenses, solve for unkown Complete the table below:

Three General Pricing Strategies When choosing a price for your product there are three general pricing strategies: 1. Price Skimming Pricing a product much higher than the average price in a market Possible reasons for this Higher value in the product Creating the perception of being an elite product A product with something unique/new that the competition doesn’t have

Three General Pricing Strategies 2. Follow the competition pricing Pricing a product around the same price as the competition’s price Possible reasons for this Similar value for a product Creating a price customers are familiar with

Three General Pricing Strategies 3. Penetration Pricing Pricing a product below the average competition’s price in the market Possible reasons for this To gain a significant market share quickly To have customers try a new product To get rid of old products/reduce inventory Low quality product

Price and Quality grid All products are priced in a way that will land them somewhere on a grid of quality and price. This is an example of placing restaurant hamburgers on a price quality grid Quality Price Increased Quality More expensive East Side Mario’s McDonald’s Street vendor Questions to think about: -Which product is price skimming? Why? -Which product is follow the competition pricing? Why? -Which product is penetration pricing? Why?

Psychological Pricing The price is set a cetain way to elicit a psychological reaction from the consumer Examples - Super elite products priced at outrageous prices to elicit a sense of entitlement on the part of the customer - Using the below website, find a product that follows this trend - Example Pricing a product at a price one cent lower than a full dollar amount (such as $7.99 as opposed to $8.00) - Using the below website, find a product that follows this trend - Example -