DR. DAWNE MARTIN MKTG 241 MARCH 15, 2011 Pricing, Start-Up Costs and Cash Flows

Administrative Things & Learning Objectives Due Tuesday, March 28: Target Market, Positioning and Marketing Mix Due Tuesday, April 5: Start up costs, Cash Flow and Profit/Lose Statements Learning Objectives  Margins, Mark ups and Mark downs  Pricing considerations  Pricing strategies  Other pricing issues  Costs Estimates  Pricing calculations

Accounting Wisdom If you lose a little on every sale, you can’t make it up with volume

Margins & Markups Mark up = Price – Variable Costs per unit Price = Product Costs + Markup Margin % = Price – variable costs/price x 100

Process of Pricing for Small Businesses Align pricing decision with overall business and branding strategies  What does price communicate about your product? Is that consistent with your brand strategy?  Build in required return on investment Identify information needed for decision  Competitor pricing (expected price range)  Identify “value” customers perceive in your product/service  Choose a pricing strategy  How will pricing affect short- and long-term profitability?

Pricing Considerations Operating costs  Rent  Labor costs  Utilities  Marketing  Financing – loan payments, interest, etc. Product cost  Purchase or production  Raw materials  Labor costs  Shipping  Insurance  Inventory stocking Alignment with strategy (and channel of distribution) Customer expectations Competitor pricing Other Issues – production capacity, need to recoup start up costs

Pricing Strategies Costs Based Strategies  Profit-Based Strategy: maximize financial performance (MC=MR) – issues with uncontrollable factors  Skimming Strategy: High initial price to recoup investments in R & D – small market with high perceived value  Economy strategy – product costs per unit low, low price moves inventory rapidly  Mark-up pricing: Total costs/number of units to be sold + mark up percentage

Pricing Strategies Market-based strategies  Penetration Strategy: Low price to gain market share – works where buyers are price sensitive  Positioning strategy: based on reputation for innovation, leadership, reliability, styling, social responsibility  Premium strategy: Premium price for prestige product/services – tightly targeted, sustainable high-end markets  Market pricing: Based on competitor prices and relative advantage  Value pricing: Higher prices for special benefits, unique experiences

Other issues Bundling Discounts  By order  Cumulative Promotions & Coupons Renting and leasing Loyalty programs Changes in terms and conditions of sales

Cost Estimates (Cash Flow) Monthly & Yearly Estimates Fixed Costs Mortgage or rent Leases (cars & equipment) Salary Commissions (projected) Benefits Licenses & permits Computers/software technology Fixtures & furniture Loan Repayments Start up costs/ R & D Internet services Other Variable Costs Office supplies Telephones Expense reimbursements Taxes Postage Shipping and fulfillment services Training and development Advertising and promotion Market research

Calculations for Cost-based Pricing Target profit price = (Fixed costs + Target Profit) + Variable costs/unit Sales Volume Units Breakeven Point Quantity = Fixed Costs – Unit variable costs Unit selling price