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Pricing a Product

Learn how to set prices effectively by understanding profit formulas, break-even analysis, and general pricing strategies for maximum profitability in marketing. Explore examples and strategies for pricing your products successfully.

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Pricing a Product

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  1. Pricing a Product

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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) • If the manufacturer sells 50 units, what is the profit? • If the manufacturer sells 500, what is the profit? • If the manufacturer sells 1000, what is the profit?

  7. Examples of Profit Complete the table below:

  8. 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:

  9. 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 15.625 = Units With break even we ALWAYS round up! Therefore, the breakeven is 16 units.

  10. Try these • 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? • 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? • 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?

  11. Examples of Break even Complete the table below:

  12. 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

  13. 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

  14. 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

  15. 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 Price More expensive • East Side Mario’s Quality • McDonald’s Increased Quality • 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?

  16. 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 - http://www.bugatti.com/en/home.html • 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 - http://director.flyerservices.com/LCL/ChangeStore.aspx?&Language=EN&BannerName=ZEHRS

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