Presentation Transcript

1. Pricing

   Chapter 7 BMI3C
2. Day 1 – Response Journal Describe a product or service you recently purchased. How much did it cost? What are some of the things/factors that you believe contribute to the product’s price? *** Save As May 1 in your Response Journal folder ***
3. Determining the Price There are two key factors that determine the price of an item; The cost of doing business The profit the company wants to make
4. Determining the Price Suppose that HMV charges $29.99 for a DVD. This price means that; HMV expects customers to pay $29.99 plus taxes to own the DVD Customers expect to pay approximately $29.99 plus taxes to own the DVD, because that is the typical price of a new release HMV bought the DVD from the manufacturer for less than $29.99 and added a dollar amount to get to that price. This is called a ________________; the amount of money added to the original cost of the product to cover expenses and make a profit Markup
5. Determining the Price HMV then uses the markup to pay employee salaries, rent and other expenses. This is called the ______________; the percentage of the price of a product charged to the consumer that is not used to pay for the cost of the product After all the expenses are paid, HMV gets to keep any money that is left over. This is called the ______________; the amount of money left over from the sale of goods and services after all expenses have been paid Profit = Markup - Expenses Margin Profit
6. Key Terms - Examples Suppose Boathouse pays the manufacturer $20 per shirt and charges the customer $30. The Markup on each shirt is … Markup = $30 - $20 = $10 The Marginon each shirt is … Margin = (10/30)*100 = 33.3% If is cost $2 per shirt in expenses, then the Profit on each shirt is … Profit = $10 - $2 = $8
7. Determining the Price Typically, pricing a product or service is not as simple as in the HMV example, as the below factors also need to be taken into consideration; Laws & pricing regulations Competition’s pricing Position/image of the product Consumer demand
8. 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 the costs To determine how many items need to be sold to cover costs, marketers perform a _______________________, which calculates the Break-Even Point; the point at which total revenue = total costs Therefore, no profit or loss is made ($0) To determine this break-even point, businesses must first calculate their Variable Costs Fixed Costs Gross Profit Break-Even Analysis
9. Break-Even Analysis __________________ are costs that are directly dependent on the quantity of good or services sold For example, a hairstylist uses 30¢ of shampoo and conditioner on each client. Therefore, the more clients, the more shampoo and conditioner used and the greater the cost The cost of materials that a business uses typically varies depending of the number or products or services sold Variable Costs
10. Break-Even Analysis __________________ are constant, and independent of the number of products or services sold Fixed costs usually remain the same for an extended period of time Fixed costs typically include; Rent Employee salaries Utilities (hydro, water, etc.) E.g. Video game store – read paragraph 2 on page 248 Fixed Costs
11. Break-Even Analysis __________________ is the selling price minus the variable costs, sometimes referred to as the contribution margin Gross profit is money left over after variable costs have been paid This money is typically used to pay off the fixed expenses E.g. take-out coffee – read paragraph 3 on page 248 Gross Profit
12. Break-Even Point As stated previously, the break-even point is the number of units that need to be sold to cover costs Once the variable costs have been covered the only costs remaining are the fixed costs Therefore, a business can calculate the break-even point by dividing the fixed costs by the gross profit BEP = fixed costs ÷ gross profit
13. Break-Even Point Example - Teddy Bear Manufacturer A teddy bear manufacturer sells its bears to retailers for an average price of $18. The variable costs are $3 per bear, and the fixed costs are $150,000. Calculate the Break-Even Point (BEP) for the teddy bear manufacturer. Gross Profit = Selling Price – Variable Costs = 18 – 3 = $15 Break-Even Point = Fixed Costs ÷ Gross Profit = 150,000 ÷ 15 = 10,000 This means that at $18/teddy bear the manufacturer would have to sell 10,000 to break even; make $0.00.
14. Break-Even Point The manufacturer then needs to decide if it can wait to sell 10,001 bears before they make a profit. If not, they can do 1 of the following; ↓ variable costs to ↑ gross profit Lowering the BEP ↑ selling price to ↑ gross profit Lowering the BEP ↓ selling price, ↑ demand Higher sales would allow the company to reach the BEP sooner ↑ sales costs (ads, promos) to try to ↑ demand Higher sales would allow the company to reach the BEP sooner ↓ fixed costs Lowering the BEP
15. Day 1 - Assigned Work Copy Figure 7.5 (including the written explanation)on page 249 into your notes Questions 2a, 2b and 2c on page 253
16. Day 2 – Response Journal What are some fixed and variable costs in your life? *** Save As May 6 in your Response Journal folder ***
17. Economies of Scale _______________________; the more products you create, the lower the cost for each product Examples; Economies of Scale
18. Economies of Scale As you will learn over the next several slides, marketers use economies of scale to help accomplish the following; Developing products for private-label companies Creating a barrier to entry for competitors Creating new brands Merging with competitors
19. Economies of Scale Developing Products for Private-Label Companies The private label (store brand) of different products (e.g. chips) at any supermarket are often the exact same as the brand name ones The only difference is the ____________; store brands are cheaper than the brand name products Often, a manufacturer of a brand name product will sign contract with a store to make their no-name product for an agreed upon price The only cost to the manufacturer are the ________________, as the FC have already been paid Win-Win: the store then gets a low-priced product to sell and the manufacturer can make a considerable profit Price Variable Costs
20. Economies of Scale Creating a Barrier to Entry for Competitors The first company to sell a new product in the market may keep the selling price high to reach the BEP sooner, but this strategy often fails because competitors can later enter at a lower price Competitors can enter the market at a lower price because their R&D costs are lower since the product development process have already been conducted by the first company to market However, if the first company prices the product low they will stimulate sales, reducing fixed costs quickly and making entry into the market unattractive for competitors
21. Economies of Scale Creating New Brands If a new product can be made using the same labour and machinery the company already owns, they can expand their product line and increase sales without increasing fixed costs Therefore, increasing company profit
22. Economies of Scale Merging with Competitors Joining with competitors in 1 of the following ways; Merger – voluntary/friendly Takeover – forced Merging with the competition usually results in a reduction in fixed costs (less duplication) The merged company becomes more efficient: less employees, lower operating costs However, staff reduction sometimes lowers consumer confidence, and therefore decreases sales
23. Diseconomies of Scale There is a point at which the economies of scale become diseconomies Can happen if companies become too large Over-expansion can cause companies to … Lose touch with local markets Limit their creativity Slow their reaction time E.g. Loh Brothers Ice Cream – read paragraph 2 on page 252
24. Diseconomies of Scale Economies of Scale may turn to Diseconomies of Scale when; A business combines its production facilities for more efficiency, some machinery may become over used and then breaks down Efficiency that results from fewer employees (layoffs and downsizing) can cause poor labour relations because the remaining employees works more, trust is reduced and job security is lost A large company can experience communication problems; errors are made and efficiency drops
25. Day 2 – Assigned Work Copy the Five Most Common Pricing Mistakes (Figure 7.9) on page 252 into your notes Read the Canadian Marketing Profile on pages 244 – 245 and answer questions #1 & 2
26. Day 3 – Response Journal Crispy Chip Company currently makes only Regular potato chips, but is considering producing Ketchup, Salt & Vinegar and All Dressed flavours as well. Based on costs, do you think it would be a good or bad idea for Crispy Chip Company to start manufacturing a variety of flavours? Why? *** Save As May 7 in your Response Journal folder ***
27. Additional Factors Affecting Price Although the cost of doing business and the profit a business wants to make are the main determinants of price, there are other factors that influence the price of goods and services such as; Laws & Pricing Regulations Product Positioning Consumer Demand Competition
28. 1. Laws & Pricing Regulations Under the Competition Act, Canadian consumers are protected against; Price Fixing By law, businesses cannot decide together what price to charge consumers Businesses CAN however copy the price of a competitor once the competitor has set that price independently Retail Price Maintenance No company can force another company to charge a certain price for a product it sold to them The _____________________________________________ is what the manufacturer wants the retailer to charge, but they cannot force them to Some manufacturers actually refuse to deal with stores that want to set their own price, but this is illegal Manufacturer’s Suggested Retail Price (MSRP)
29. 1. Laws & Pricing Regulations Deceptive Pricing Practices Makes double ticketing, bait-and-switch pricing and false sale prices illegal _____________________ refers to the practice of placing 2 prices on the same product and charging the consumer the higher price _____________________________ occurs when a product is advertised at a low price to attract customers into the store (bait), and then the sales staff tries to convince the potential consumer to buy a more expensive product ________________________ refers to the practice of advertising a regular price as a sale price Sometimes, stores will raise their prices by 20% before having a 20% off sale Double Ticketing Bait-and-Switch Pricing False Sales Prices
30. 1. Laws & Pricing Regulations Marketing Boards _______________________ are government organizations the market particular products, usually commodities such as milk, wheat, eggs, etc. These boards are funded by the farmers who produce the products Marketing boards support research and promotion initiative, and some are even involved in regulating the price the product is sold at In rare cases, marketing boards even control supply, telling farmers they amount they can produce (setting a quota)
31. 2. Product Positioning Price is a major part of aproduct’s image A business will use ____________________ if it wants to position itself as a providing a premium/luxury item Consumers find it difficult to believe that a product is of high quality, if it has a low price E.g. BMW cars, Michal Kors purses, etc. A business is using ______________________ if they sell their products at a cost that is lower that what consumer expects E.g. XS Cargo, Dollar Store, etc. Premium Pricing Discount Pricing
32. 3. Consumer Demand A major consideration in deciding how much to charge for a product is figuring out how much the consumer is willing to pay for an item At a certain price, demand will decrease and customers will look to buy alternative products E.g. Gourmet Food store – read paragraph 3 on page 259 Certain products are very __________________, meaning that a small change in price (increase or decrease) will create a large change in demand (increase or decrease) E.g. Movie Theatres – read paragraph 4 on page 259 Price Sensitive
33. 4. Competition Competition forces sellers of the _____________________ products to remain close to one another in product pricing Unless there is a distinct _______________ between one product and another , consumers will usually choose the product that has the lower price Same or Similar Difference
34. Day 3 – Assigned Work Complete questions 1a, 1b, 2a and 2b on page 265
35. Day 4 – Response Journal Typically, in each industry there is one company that is known as the “leader”. What company do you believe is the “leader” in the coffee shop industry? In the pop industry? Why do you believe these companies hold the “leader” role? *** Save As May 8 in your Response Journal folder ***
36. Pricing Strategies A _____________________ is a plan to price a product to achieve specific marketing objectives The three possible pricing strategies are … Market Skimming Penetration Pricing Competitive Pricing Pricing Strategy
37. 1. Market Skimming If a products enters the market first, there is a window of opportunity for a company to capitalize on that product’s uniqueness during the introduction stage of the PLC ______________________ is setting an initially high price for a product or service before competitors enter the market With no competition the business can set the price high to try and reach the BEP quickly and cover costs Once the costs are covered, the company can reduce the price of the product or service when competitors enter the market Market Skimming
38. 1. Market Skimming Although the market skimming strategy can be very effective there are also some disadvantages, such as … If a business does not recoup costs before competition enters, they could be at a competitive disadvantage Competitors can also benefits if the first company to market uses a market skimming strategy Competitors don’t need to spend much on R&D (1st company did it) The original product has already established consumer awareness (1st company paid for ads) Distribution methods are already established and can be used by the competition (set up by 1st company) Therefore, competitors can launch their products at a lower price than the original because their costs were much lower
39. 1. Market Skimming Marketers sometimes use market skimming to limit demand for a new product, if the company cannot produce enough to meet heavy demand The initial high price attracts buyers who have a high income or who want it badly enough they are willing to pay the high price Then, when the production facility can accommodate a higher demand, the company can lower the price Examples products that have used the market skimming strategy include; Calculators, VCRs, DVD players and MP3 players Read paragraph 3 on page 262
40. 2. Penetration Pricing When marketers use ______________________, they initially set a low price to attract customers This strategy can be very effective but also very risky Market penetration sets the price of a product or service at a competitive level, even though there aren’t any competitors The competition will now need to meet or beat the price established by the first company, which should delay the entry of competitors Penetration Pricing
41. 2. Penetration Pricing Costs will be quickly recouped because of high consumer demand The lower price also encourages customers to buy now rather than wait, which will make it even more difficult for competitors to capture a share of the market (consumers are already loyal to the original brand) This strategy should only be used when variable costs are low and one-time development costs are high E.g. when Sony introduced its PlayStation in 1995, the company used a lower than expected price to try and dominate the home video-game market
42. 3. Competitive Pricing The most popular pricing strategy, ________________________, means that products in a specific category match or follow competitors closely Since prices are relatively the same, companies compete against one another using ads, promos, distribution methods and product features Usually, the competitors in an industry follow a leader who sets the _____________________, which is the standard price for that type of product or service Competitive Pricing Benchmark Price
43. 3. Competitive Pricing The leader is usually the company that has the largest market share, who was the first to market or has been around the longest Once the leader has set the benchmark price competitors can do one of the following; Meet the price and product standard of the leader Improve their product and then charge a higher price than the leader Make a less expensive version of the product and charge less In every case, however, the price of any product or service is always compared to the price of the benchmark product E.g. The price of a cup of coffee at Second Cup will always be compared to the price of a cup of coffee at Tim Hortons
44. 3. Competitive Pricing Some retailers have a strict competitive pricing policy and will meet or beat any competitors prices E.g. Walmart provides an Ad Match Guarantee - if a customer finds a lower advertised price on an identical product at another store, they will match it, right at the register Some stores hire ________________________ (people who are paid to shop) and whose job it is to research the competition Comparative Shoppers
45. Day 4 – Assigned Work Answer question 3a on page 265 Provide an example of a product or service that you believe uses the market skimming strategy? Do you believe that this is a good strategy for this particular product/service? Provide an example of a product or service that you believe uses the penetration pricing strategy? Do you believe that this is a good strategy for this particular product/service?