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CHAPTER 7 PRICING
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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
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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.
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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
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7.1 DETERMINING THE PRICE Economies of Scale
The more products a company makes, the lower the cost of production
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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
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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.
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7.1 DETERMINING THE PRICE What are the 5 most common pricing mistakes?
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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)
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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)
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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?
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