Pricing Concepts

The Importance of Price To the seller price is revenue To the consumer price is the cost of something Revenue=The price charged to customers multiplied by the number of units sold Profit=Revenue -expenses

Pricing Objectives 1. Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs 3.Establishing a Competitive Position Placing prices above, equal to or below those of competitors 2. Sales Volume Maximization To increase the volume of sales each year Market Share- a company’s product sales as a percentage of total sales for that industry.

Return on Investment (ROI) Net profit after taxes divided by total assets ROI = Net profit after taxes Total assets

The Role of Demand in Pricing Demand - the quantity of a product that will be sold in the market at various prices for a specified period of time. Supply – The quantity of a product that will be offered to the market by a supplier at various prices for a specific period of time. Price Equilibrium- The price at which demand and supply are equal. Elasticity of Demand- consumer’ responsiveness or sensitivity to changes in price.

Factors that affect elasticity of demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation

Cost Determinants of Price Types of Costs Variable Costs Fixed Costs Varies with changes in Does not change as level of output level of output changes raw materials, Rent and rates direct labour, fuel Depreciation revenue-related costs such as commission. Administration costs Research and development Marketing costs (non- revenue related)

Understanding the BEP Total Revenue= Selling Price(P) per unit x # of units sold(X) Total Costs = Fixed Costs (TFC) + Variable Costs(V)

px = vx + FC + Profit Where, p is the price per unit, x is the number of units, v is variable cost per unit and FC is total fixed cost.

Break Even Point The break-even level or break-even point (BEP) represents the sales amount—in either unit or revenue terms—that is required to cover total costs (both fixed and variable). Total profit at the break-even point is zero. Break-even is only possible if a firm’s prices are higher than its variable costs per unit. If so, then each unit of the product sold will generate some “contribution” toward covering fixed costs.