 Product / Price / Promotion / Place Marketing....

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Product / Price / Promotion / Place Marketing...

Price:

Price has many names…

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 10 –––––– = ––– = 50% cost to retailer 20 cost to customer > \$30 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 \$10 ––––––––– = ––– = 33.3% selling price \$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 \$0.20 +.11 \$0.34 Expenses = \$0.11 Markup = \$0.20 Store Cost = \$0.34 Markup as % = = 91% DETERMINING THE PRICE

Wal*mart / Skittles Margin Example \$0.11 + 0.20 \$0.65 Expenses = \$0.11 Markup = \$0.20 Selling Price = \$0.65 Margin = = 48% Margin = Markup + Expenses Selling Price

Wal*mart / Skittles Margin Example Therefore, every time Wal*Mart sells Skittles it makes a 48% profit margin DETERMINING THE PRICE

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? \$5.00 Duh…!

Breakeven Analysis 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% [ 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 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 Subway Pricing and BEP Example

Breakeven Analysis Subway Pricing and BEP Example So what is the BEP? Assume Subway pays the following monthly Fixed Costs: Wages \$10,400 Rent \$1,900Hydro \$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