Section Objectives Explain how to carry out a break-even analysis. Calculate markup and markup percentages. Use markdown formulas to determine sale price. Explain how to employ formulas used to calculate discounts. List considerations for updating the price strategy.

The Main Idea Implementation of the price strategy requires an understanding of pricing formulas. Keeping your price strategy in tune with your market requires ongoing review and revision.

Content Vocabulary break-even point selling price Markup Keystone Pricing markdown

Break-Even Analysis Selling Price The actual or projected price per unit to the consumer. To calculate the break-even point, you divide fixed costs by the selling price minus your variable costs. break-even point the point at which the gain from an economic activity equals the costs involved in pursuing it

Break-Even Analysis Break-even analysis does not tell you what price you should charge for a product, but it gives you an idea of the number of units you must sell at various prices to make a profit.

Break-Even Fixed Cost ÷ (Unit Selling Price – Variable Costs) = Break-even point Example: A developer wants to sell a new Web-based game for $10 per unit. The cost per unit will be $6.50. To produce the game, the developer must purchase $7,000 of new equipment. How many units must be sold at $10 for the developers to break even? $7,000 ÷ ($10 - $6.50) = What if we take the price up to $12? $7,000 ÷ ($10 - $6.50) = 2,000 Price at $12 $7,000 ÷ ($12 - $6.50) = 1272.7 Round up to 1273

Break-Even Practice Fixed Cost ÷ (Unit Selling Price – Variable Costs) = Break-even point You are opening a pizza parlor. How many pizzas will you need to sell at $8 if the pizza oven (fixed cost) is $8,500 and the ingredients for a basic pizza (cheese, pepperoni & sausage) is $2.60. You are opening a hair salon. How many customers will you need if the average selling price is $55 and your costs are $15,000 (fixed) and the variable costs per haircut are $20. $8,500 / 8 – 2.60 = 1,574 pizzas 15,000/ 55 – 20 = 428.57 people or 429 people.

Markup Businesses that purchase or manufacture goods for resale use markup pricing based on the cost of the item. KEYSTONE – a strategy of doubling the cost to set the price. markup the amount added to the cost of an item to cover expenses and ensure a profit Keystone Pricing The pricing method of setting prices based on double the wholesale price or cost of the product.

Markup Formulas for markup include three variables: Cost, Markup and Price Cost + Markup = Price Price – Markup = Cost Price – Cost = Markup Example: A pen costs $5 to make and you want to make $2 profit on it. Sell it for $7.

Markup To convert the markup to a percentage, use this formula: Markup ÷ Cost = Percentage Markup on Cost To calculate markups as a percentage of selling price: Markup ÷ Selling Price = Percentage Markup on Selling Price Pen Example: $2/ $5 = 40% markup on cost OR $2/ $7 = 28.5 or 29% markup on selling price

Markup Practice To convert to the markup to a percentage, use this formula: Markup ÷ Cost = Percentage Markup on Cost To calculate markups as a percentage of selling price: Markup ÷ Selling Price = Percentage Markup on Selling Price Practice – As a ski shop owner, you have purchased some new equipment for $225 and want to make $350 on them. What is the percentage markup based on cost and price? As a ski shop owner, you have purchased some new equipment for $225 and want to make $350 on them. What is the percentage markup based on cost and price? 350/225 = 1.55 or 155% on cost 350/ 575 = 60.8 or 61% on selling price

Markdown Entrepreneurs may use markdown pricing to tempt shoppers to buy in order to reduce inventory. markdown the amount of money taken from the original price

Markdown In order to calculate the markdown, you need to know the original price, the markdown percentage and the markdown dollar amount. For example, you own an electronic store and want to encourage the sales of your $400 cell phones. You decide to mark them down by 30%. Price x Markdown Percentage = Markdown $$ $400 x .30 = $120 Price – Markdown $$ = Sale Price $400 - $120 = $280

Multiply the item price by the discount percentage. Discounts A discount is a reduction in price to the customer. Multiply the item price by the discount percentage. Subtract the discount dollars from the price.

Possible Changes to Pricing Strategy Adjusting Adjusting prices to maximize profit Reacting to market prices Reacting Revising Altering terms of sale 16

Adjusting Prices to Maximize Profit Before you adjust prices to maximize profit, ask yourself two questions: Are your products’ prices elastic or inelastic? What are your competitors’ prices?

Reacting to Market Prices As part of ongoing market research, keep an eye on current market prices for your products.   If competitors’ prices fall, you will lose customers if you do not lower prices. If competitors’ prices rise, it is important to your business’s financial health to raise prices.

Revising Terms of Sale Another way to change your pricing strategy is to revise the terms of sale, by means such as: changing credit policies introducing discounts offering leasing arranging financing