PAUSE FOR THOUGHT

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? BMI3C Unit 7

2. PRICING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24. BREAK-EVEN POINT • In the example from the text: • Var. costs for making bear: $3 per bear • Selling price: $18 Fixed cost: $150,000 • GP = SP – VC • GP = 18 – 3 = 15 • BEP = fixed costs ÷ gross profit • BEP = 150,000 ÷ 15 = 10,000 BMI3C Unit 7

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

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

27. ECONOMIES OF SCALE • Economy of scale: the more product you create, the lower the cost for each item. BMI3C Unit 7

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

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

30. ECONOMIES OF SCALE • Developing products for • Private-Label companies How it works MON TUE WED THU FRI GV MC PC BMI3C Unit 7 OC

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

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

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

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

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

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

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

38. REVIEW SO FAR • What is: • Markup • Margin • Profit • Fixed costs • Variable costs • Gross profit • BEP formula BMI3C Unit 7

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? BMI3C Unit 7

40. Additional Factors Affecting Price

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

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

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

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

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

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

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

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

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

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 BMI3C Unit 7