Presentation on theme: "Pricing Your Food Product"— Presentation transcript:
1Pricing Your Food Product Module designed by Tera Sandvik, LRD, Program Coordinator; Julie Garden-Robinson, PhD, LRD, Food and Nutrition Specialist;and Kathleen Tweeten, MBA, Director, Center for Community Vitality, Community Economic Development Extension Specialist2007
2The following tips will help you navigate through each module. Click the left mouse button or the down arrow to continue on to the next bullet or slide.Before you begin, you’ll take a presurvey.The presurvey will open in a new window.When you are finished with the presurvey, close the window to return to the module.A symbolizes a question slide. You’ll need to click your mouse once to see the answer.
3A means you’ll need to go to the site listed to answer the question. After visiting the site, close the Internet browser to return to the module.Click your mouse once to see the answer.When you are finished with the module, you will take a post-survey.The post-survey will open in a new window.When you are finished with the post-survey, close the window to return to the module.
4PresurveyBefore we begin let’s take a presurvey to see how much you already know.Click here to begin the presurvey.
5I have my product, but how much is it worth? $20$100$30$10$5$75$15$35$40
6CostWhen selling a product, make sure you make enough profit to cover your:Fixed costsVariable costs
7Fixed CostFixed costs are expenses that must be paid no matter how many goods or services are offered for sale.Some examples are:RentUtilitiesInsuranceInternet service
8Variable CostsVariable costs are expenses that change with the number of products offered for sale.Some examples are:Raw materials (jars, sugar, etc.)The more products you sell, the more raw materials you need to produce the extra products.Electric power to run machinesCost of maintaining inventory
9You have ways to reduce fixed costs per unit sold. If you sell more units, the percentage of fixed costs is reduced. For example:Variable cost = $1.50Fixed cost = $50Units sold = 100Price per unit = $4%Fixed cost = 25%If units sold increased to 200:%Fixed cost = 14%$1.50 x 100 units = $150$150 + $50 = $200 (total cost)$50/$200 = 25%$1.50 x 200 units = $300$300 + $50 = $350$50/$350 = 14%
10Which of the following is a fixed cost? SugarRentJarsClick to see the answer.
11Which of the following is a variable cost? InsuranceRentSugarClick to see the answer.
12Now that you know what fixed and variable costs are, let’s move on to break even analysis. The break even point is how many products you must sell to cover your costs.We’ll go through an example on the next slide, followed by a link that will give you your break even point.
13Example Variable cost (VC) = $2.50 Fixed cost (FC) = $500 Price per unit (PPU) = $5How many units (A) must you sell to break even?(VC x A) + FC = PPU x A(2.50 x A) = 5 x A500 = 5A – 2.5A500 = 2.5A500/2.5 = AA = 200 units must be sold to break even
14Go to the following link using the same numbers as the previous example and you should get the same answer of 200 units.In case you forgot:Variable cost = 2.50Fixed cost = 500Price per unit = $5Hint: Expected unit sales is anything greater than 1.
15In the previous examples, the break even point was 200 units. If more than 200 units are sold, you will have a profit; if less than 200 units are sold you will have a loss.
16Go to: http://www.dinkytown.net/java/BreakEven.html Plug the following numbers into the break even calculator. Is there a profit or a loss?Variable cost = $2Fixed cost = $300Expected unit sales = $200Price per unit = $4Click to see the answer.Profit
17Go to: http://www.dinkytown.net/java/BreakEven.html Plug the following numbers into the break even calculator. What is the break even point?Variable cost = $3Fixed cost = $400Expected unit sales = $200Price per unit = $6Click to see the answer.133 Units
18Marginal costMarginal cost by definition is the change in cost that results from changing the output by one unit.Basically it’s the difference in variable costs based on units sold.For example:Variable cost = $200 for 15 units soldVariable cost = $215 for 16 units soldMarginal cost difference = $15The difference between variable costs
19Marginal costGo to: for a more in-depth, interactive explanation about marginal costs.Remember to come back after exploring the Web site.
20What is marginal cost?The change in cost that results from changing the output by one unitThe cost of overheadThe charge for permanent part-time laborNone of the aboveClick to see the answer.
21Pricing your product You have a few ways to price your product: Cost-plus pricingCost-based pricingPercent food cost pricingContribution pricingWorking-back method (expected return)
22Before moving on to pricing methods, let’s review a couple of terms and go over a couple of new ones.Fixed costs are expenses that must be paid no matter how many goods or services are offered for sale.Variable cost are expenses that change with the number of products offered for sale.Direct costs are directly related to the production of a product.Cost of sugar to make jelly is a direct cost.Indirect costs are not directly related to the product, but have to do with overall production.Rent would be an indirect cost.
23Cost-plus pricingThis is a simple and popular way to price a product/service.You buy 100 products for $1,000.$1,000/100 = $10This is the basis for which you sell each product.If you want a 20% profit, you should sell the product for $12 (120% x $10).This method allows you to cover all direct costs and generate a profit.The downside is you have not considered the needs of the market or compensated for any indirect costs.
24Use the cost-plus pricing method in the following example. You buy 50 products for $1,000 and want to make a profit of 30%.What’s the selling price?Click to see the answer.$1,000/50 = $20$20 x 130% = $26The selling price should be $26.
25Cost-based pricingCost-based pricing uses unit costs of ingredients, expenses and labor to determine the price.Costs will fall under fixed or variable costs.You need to know your total costs before you can find your break even point.Once you know your total costs, figure out how much you must sell your product for to cover them.Then add your profit.
26Cost-based pricing example Fixed costs = $200Variable costs = $5Units = 100You want a profit of 20%$200 + (100 x $5) =$700Total costs = $700$700/100 = $7 (If you sold them for $7 you would break even)$7 x 120% = $8.40The selling price should be $8.40 to cover costs and make a 20% profit.
27Use the cost-based pricing method in the following example. Fixed costs = $100Variable costs = $3Units = 50You want a profit of 20%. What’s the selling price?Click to see the answer.$100 + (50 x $3) = $250Total costs = $250$250/50 = $5 (If you sold them for $5.00 you would break even)$5 x 120% = $6The selling price should be $6 to cover costs and make a 20% profit.
28Percent food cost pricing Percent food cost pricing is based on the theory that food cost makes up about 40 percent of the price.To establish a price, multiply the food cost by 2.5 (40 percent times 2.5 = 100 percent).This method commonly is used for catering businesses, but only if a product does not require a great deal of labor or if ingredients are not very expensive.
29Use the percent food cost pricing method in the following example. It costs you $2 to make a club sandwich.What should the selling price be?Click to see the answer.$2 x 2.5 = $5You should sell the sandwich for $5.
30What information do you need to figure out percent food cost pricing? Cost of laborKitchen remodeling costInsurance costFood costClick to see the answer.
31Contribution pricingContribution pricing allows you to cover all direct costs (per product), but also allows a contribution toward indirect costs and profit.The next slide will walk you through an example.
32Use the contribution pricing method in the following example. Your product has a direct cost of $50 and you want to make a contribution of $20 to indirect cost and profit.If indirect costs are $1,000 and you want to make a profit of $300, how many products do you have to sell?Click to see the answer.$1,000 + $300 = $1300 (indirect cost + profit)$1,300/$20 = 65You need to sell 65 products to cover indirect cost and make a $300 profit.
33Working-back method This method is most useful for smaller businesses. If a business sells 100 products each month and the total costs (fixed, direct, indirect, etc.) for the month are $1,000 and the business owner expects to cover all his costs and make a profit of 50%, he must sell $1,500 worth of products.Therefore, the business owner sells his products at: $1,500 / 100 units = $15 per product
34Working-back method cont. If your price is higher than the competitor using this method, offer something more to compensate for the higher price.For example:A competitor charges $100 for a cake. As a result of using this pricing method you charge $120. To prevent losing customers to the cheaper business, upgrade your service to include delivering the cake.The extra quality in the service may require slightly longer hours, but it will compensate for the higher price.
35Use the working-back pricing method in the following example. You sell 200 products each month.Total cost = $500You want a 50% profitWhat should your selling price be?Click to see the answer.500 x 150% = 750750/200 = $3.75You should sell your product at $3.75 to make a 50% profit.
36We hope this module has helped you determine what your product is worth. Use this module, along with the other modules, to get you on your way.
37Post-survey Let’s see what you’ve learned. Click here to begin the post-survey.The last slide shows additional resources.After the slideshow is done go to “File” and click on “Print.”A box will open up.Click on “Slides” under “Print Range.”Type in “38” and click on “okay.”
38Additional Resources University of Omaha Interactive Tutorial Interactive Tutorial