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Chapter 7

Pricing

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Name a product that you have recently purchased.

How much did you pay for the product?Why do you think it cost that much?List as many reasons as possible.

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There are two key factors that determine price:

1. The cost of doing business

2. The profit that a company hopes to make from the sale of its product or service.

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Pricing Terms

1. Markup – the amount of money added to the original cost of the product to cover expenses and make a profit.

Cost + $ Mark-up = Price($500 sofa + $300 Mark-up = $800

This method is best used for: services, high price/luxury items, i.e. cars, furniture.

2. Margin – the percentage of the price of a product charged to the consumer that is not used to pay for the costs of the product.

Cost + % Mark-up =Price($50 muffler + 60% Mark-up = $80

$50 X .60 = $30$50 + $30 = $80

This method is best used for a lot of different product/services i.e. convenience store, auto parts store.

3. Profit – the amount of money left over from the sale of goods or services after all expenses have been paid

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Break-Even Analysis – calculates the break-even point, which is the number of units that a business must sell at a given price to cover its costs. To calculate the break-even point you must first calculate the variable costs, fixed costs, and gross profit.

Break-even Point (BEP) = fixed costs gross profit Gross Profit – the amount of money made by a

company after it subtracts the variable costs of that product from its selling price. Sometimes referred to as the contribution margin.

Gross Profit = Selling Price – Variable Costs Variable Costs – costs that can go up or down

depending on the amount of product made or services provided. (e.g., cost of raw materials or packaging)

Fixed Costs – something that never changes regardless of how many items are produced. (rent)

Quantity Sold

10,000

Bears

15,000

Bears

1,000

Bears

Co

sts

and

rev

enu

e

$ 18,000

$ 270,000

$ 180,000

Fixed Costs: $150,000

Break-even Point

Variable Costs @

$3 per unit

Analysis: Notice how, as the quantity sold increases, the variable costs increase, but the fixed costs stay the same. The business will make profit if sales are above the Break-even point.

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With the break-even point a business can determine the level of sales necessary for profit, the results of lowering or raising prices, and the results of increased or decreased sales.

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What can a business do to change the BEP? Reduce the variable costs to increase the gross

profit and reduce the break-even point Increase the selling price to increase the gross

profit and reduce the BEP Decrease the selling price to increase demand;

higher sales might mean that the company can reach the BEP more quickly

Increase sales cost, such as advertising and promotion, which may increase demand; higher sales might mean that the company can reach the BEP more quickly

Reduce the fixed costs to reduce the BEP

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Calculating Profit: Gross Profit & Break-Even Point

Quantity 1 50 100 500 1000 2000 10,000

Total Fixed Cost

$18,000 $18,000 $18,000 $18,000 $18,000 $18,000 $18,000

Total Variable Cost

22 1100 2200 11,000 22,000 44,000 220,000

Total Cost $18,022 $19,100 $20,200 $29,000 $40,000 $62,000 $238,000

Fixed cost per unit

$18,000 $360 $180 $36 $18 $9 $1.80

Variable cost per unit

$22 $22 $22 $22 $22 $22 $22

Total Cost per unit

$18,022 $382 $202 $58 $40 $31 $23.80

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ECONOMIES OF SCALE

The more products a company makes the lower the production costs for each individual product. Marketers use economies of scale to:

1. Develop products for private-label companies

2. Create a barrier to entry for competitors

3. Create new brands

4. Merge with competitors

5. Develop new pricing strategies

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1. Developing Products for Private-Label Companies - Example: The (store) brand of potato chips in any major supermarket contains the exactly the same potato chips as one of the brand named bags

2. Creating a Barrier to Entry for Competitors: doing something that may discourage other companies from launching the same type of product or service (pricing the product/service at a very low price or having an exclusive deal with a supplier.)

3. Creating New Brands – using the existing labour force to create more then one item

4. Merging with Competitors- usually results in lower fixed costs

Economies of Scale

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DISECONOMIES OF SCALE

Bigger is not always better. Some firms may become too big. (The head doesn’t know what the feet are doing)

Video

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Section 7.2

Additional Factors Affecting Price

1. Laws

2. Marketing Boards

3. Product Positioning

4. Consumer Demand

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Laws - the Canadian government has laws protecting consumers against the following

Price Fixing – when competing businesses decide together what to charge the consumers for a specific product.

Retail Price maintenance – the forcing of one company by another to charge a certain price for a product they have provided. (E. g. Manufacturer’s suggested retail price)

Deceptive Pricing Practices – fraudulent pricing techniques used to attract the consumer in a dishonest manner. Such as:

Double ticketing – placing two prices on the same product and charging the customer the higher price.

Bait-and-switch pricing – advertising a low price on a product to attract customers and then trying to sell a more expensive product.

False sale prices – advertising a regular price as a sale price.

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2. Marketing Boards

organizations that market particular products, usually commodities (e.g., milk, wheat, eggs); funded by the people who produce these products. (Sometimes set prices)

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Product Positioning

Price is a major component of a product’s image. The types of price positioning that can be used are:

Premium Pricing – used if a business positions itself as a premium product. (luxury automobile, high fashion dress, the product must be expensive)

Discount Pricing – a price lower than a customer would normally pay for a product. (Discount stores can charge less because it has a lower fixed costs than a non-discount store)

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Consumer Demand

How much are consumers willing to pay Always easier to start high and lower

prices, then to start low and raise them.Competition will also affect your price, if

there is no competition, then prices can be higher if consumers are willing to pay that price.

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Section 7.3

Pricing Strategies

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Pricing Strategy – a plan to price a product to achieve specific marketing objectives. Three possible strategies are:

1. Market Skimming

2. Penetration Pricing

3. Competitive Pricing

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Market Skimming setting an initially high price for a product

or service before competitors enter the market.

The business can reach the break-even point quickly and recover development costs, therefore in a great position to lower the price if competitors enter the market.

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Penetration Pricing

Setting a low price to attract new customers. Effective, but risky, use when variable cost are

low.

Competitive Pricing Matching or coming close to the price at which

the competitor is selling its product. The battle for market share is fought with

advertising, promotion, distribution, or a unique product feature.

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SECTION 7.4

PRICING POLICIES

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PRICING POLICIES

Return on Investment Everyday Low Prices Purchase Discounts Super Sizing Negotiated Pricing

Interest Free Pricing Leader Pricing Combo Pricing Psychological Pricing Price Lining

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1. Leader Pricing - offering a product at a lower price to attract customers to the store.(Sobeys selling Pop for $0.65)

2. Price Lining – putting a number of products together and selling them for one price. (Ex. On a rack of T-shirts, that cost $8, there may be T-shirts that cost the store $2& $3 with some that cost $4 & $5.)

3. Everyday Low Prices – a stores guarantee to customers that the price they pay for items in the store is the lowest possible price.

4. Super Sizing – adding a low cost to a product to increase its selling price and profitability. 100% profit for business Popcorn, pop

5. Negotiated Pricing – buyer makes and offer to purchase and a seller makes an offer to sell. (real-estate, new cars)

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6. Interest-Free Pricing – Free for one year.7. Combo Pricing – deal on one part of the sale, high

profits on the other part. (buy a 99-cent hamburger, but you must buy drinks and fries too.)

8. Psychological Pricing – using typical behaviour traits to determine product pricing. (odd-cent pricing, even-dollar pricing)

9. Return on Investment – the percentage of profit a store owner realizes each year on the capital invested in the store.

10. Purchase Discounts – price reductions in goods or services offered by the seller to the buyer to increases the volume of an order.

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Section 7.5

Pricing for the International Market

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Factors affecting pricing in international markets:

1. Tariffs – taxes levied by governments on imported goods. Imposed to protect domestic industries from low priced imports.

2. Transportation Costs3. Currency Values4. Extra Charges –(special insurance,

other taxes, translation and packaging costs.)