Marketing...
Product /
Price
/ Promotion / Place
Price:
Price has many names…
DETERMINING THE PRICE
Two key factors determine the price
of an item:
–the cost of doing business
–the profit the company wants to
make
Simple formula:
Price = Cost of Doing Business + Profit
DETERMINING THE PRICE
The HMV Scenario
•HMV charges $24.99 for a Blu-ray
•Expectations:
–HMV expects customers to pay $24.99 plus
taxes to own the Blu-ray
–Customers expect to pay $24.99 plus taxes to
own the Blu-ray, since most cost that amount
–HMV paid less than $24.99 for the Blu-ray,
added an amount to get to that figure – markup
–HMV gets to keep the money left after all
expenses have been paid – profit
DETERMINING THE PRICE
The HMV Scenario cont’d
•HMV charges $24.99 for a Blu-ray
•Expectations cont’d:
–The Blu-ray costs the manufacturer less to make than
what they charge HMV
–The manufacturer uses that money to pay for the
factory, materials, salaries…
–Money left over is theirs to keep (profit)
–The makers of the materials used in the Blu-ray
production sell items for more than they cost
…and so on…
DETERMINING THE PRICE
Important Terms
MARKUP
A percentage of the cost of an item added to cover
expenses and make a profit
Example: If a blu-ray costs the customer $30, and costs
HMV $20, the markup is then 50%:
markup
––––––
cost to retailer
=
cost to customer >
10
–––
20
$30
= 50%
DETERMINING THE PRICE
Important Terms cont’d…
MARGIN
The percentage of the price charged for the item
which is not used to pay for the cost of the item
Example: for a $20 item, if customer pays $30
there is a $10 markup and the margin would be:
markup
–––––––––
selling price
=
$10
––– = 33.3%
$30
DETERMINING THE PRICE
Important Terms cont’d
GROSS PROFIT
Money left over after all “variable costs” have
been paid.
business
gross profit = markup expenses
DETERMINING THE PRICE
Wal*mart / Skittles Markup Example
Expenses = $0.11
Markup = $0.20
Store Cost = $0.34
Markup as % =
$0.20 +.11 = 91%
$0.34
DETERMINING THE PRICE
Margin = Markup + Expenses
Selling Price
Wal*mart / Skittles Margin Example
Expenses = $0.11
Markup = $0.20
Selling Price = $0.65
Margin =
$0.11 + 0.20
$0.65
= 48%
DETERMINING THE PRICE
Wal*mart / Skittles Margin Example
Therefore, every time Wal*Mart
sells Skittles it makes a 48%
profit margin
Breakeven Analysis
How many units must be sold at a given price to cover
all operating costs?
Three parts to break-even analysis:
1. Variable Costs: Costs that depend on the quantity
of products or services sold.
2. Fixed Costs: Costs that are constant. Do not
depend on # of sales and remain the same for long
periods of time (rent, salaries, utilities, etc)
3. Gross Profit: The selling price minus the variable
costs (money left over after variable costs have
been paid)
Breakeven Analysis
Gross Profit Ice Cap Example
Selling Price = $1.49
Variable Cost = $0.35
GP = Selling Price - VC
Therefore, $1.14 of Gross Profit is made
with every sale of an Iced Cap
Breakeven Analysis
Break-Even Point:
BEP is the # of units that
must be sold at a given price
to cover all operating costs
BEP = Fixed Costs
Gross Profit
Breakeven Analysis
The BEP for just Ice Caps is hard to
calculate because Tim Horton’s sells
many other items ( Bagels, donuts,
coffee, etc), however, lets say a typical
Tim’s has a fixed cost of $57 on Ice Cap
sales per day:
$57 (Fixed Costs) = 50 (BEP)
$1.14 (Gross Profit)
Tim’s must sell 50 Ice Caps per day to reach the BEP.
Breakeven Analysis
Subway Pricing and BEP Example
Subway has the following costs for a
“Footlong” assorted sub it sells:
Bread = $0.27
Meat
= $1.08
Toppings = $0.20
Expenses = $1.05 (includes all other VC )
Subway wants to make $2.40 per sub.
What should the price be?
Breakeven Analysis
Subway Pricing and BEP Example
What is subway’s cost of a footlong?
(.27+1.08+.20)= $1.55
What is the margin?
(1.05+2.40)/5= 69%
[ Margin = Markup + Expenses / Selling Price ]
Total Variable costs?
1.55+1.05=$2.60
What is the markup? $3.45
As a percentage:
(2.40+1.05)/1.55= 222%
The Numbers:
Base Costs:
Bread
= $0.27
Meat
= $1.08
Toppings = $0.20
Expenses = $1.05 (includes all VC)
Subway MARKUP = $2.40
Cost to customer = $5.00
[ cost of an item added to cover expenses and make a profit / base cost of item ]
What is the gross profit? 5 – 2.60 = 2.40
Breakeven Analysis
Subway Pricing and BEP Example
So what is the BEP?
Assume Subway pays the following monthly Fixed Costs:
Wages $10,400
Rent $1,900
Hydro $650
FC = $12,950
BEP = $ 12,950 / $2.40 = 5,395 subs
Therefore, Subway needs to sell 5,395 subs per month just
to break even! If a subway is open 30 days a month that
would require a typical subway to sell 180 subs a day (or
15 an hour) to reach the BEP.
Approaches to Reaching the
Breakeven Point Faster…
1. ↓ selling price, ↑ demand, higher sales = reach
the BEP sooner
2. ↑ sales costs (ads, promos) to try to ↑ demand,
resulting in ↑ sales = reach the BEP sooner
3. ↓ fixed costs to reduce BEP
Product /
Price
/ Promotion / Place
End of Part 1
To do: complete work sheet
Go to Part 2