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The amount of money added to the cost of the


calculated how?

Price -cost


price= 100

The $75 difference goes


1. rent
2. salaries
3. other business expenses



If theres any money left To keep it

over after all expenses are
paid the owner gets

Margin-fixed costs=profit

Break Even Analysis

Tells you: How many units/dollars must be sold in

order to cover operating costs

Break even analysis is the starting point of setting the actual price
Break Even Point

The number of units a business must sell to cover its


Variable Costs

The cost that goes into selling each unit-(1-margin)


1. For each meal sold at a restaurant, the cost of

the food might represent 25% of the costmarkup=75%

2. For a plumber, the cost of the material and

goods used to do a job might be 50% of what
they ultimately charge the customer
Fixed Costs

Are constant and independent of sales

An increase in sales does not have any effect on Fixed costs


1. rent
2. insurance
3. salaries
4. utilities
5. administrative costs

All businesses should determine their average fixed costs per day as well as their
average variable costs
All businesses should determine their average variable costs
Gross Profit=

Selling price variable costs

Gross margin=

1-variable cost %

Break Even=

Fixed costs/margin-Units
Fixed Costs/markuo-Dollars


1. Restaurant:

Pizza price $10

Cost to make $3

Margin $7

Markup (1-(cost/price): 1-.3=.7 or 70%

70% of everything they sell is profit that goes

towards paying for fixed costs. Once the Fixed costs
are covered, the rest is profit.
2. Plumber:
1. Markup=50% (half of what they charge
goes towards paying the material)
2. Fixed cost per day=$200
3. B.E. = 200/.5=$400
Economies of Scale

The more products a company makes, the lower the

cost of production for each item.

The learning curve:

You get better and more efficient at a task with each

time you accomplish it, until you finally cant get
much better without using a new or better

Things Economies of scale

can lead manufacturers to:

1. develop no-name brand products

2. create barriers to entry
3. create new brands
4. merge with competitors

Developing Products for

Private Label Companies

Private Label (store brand) products are made by the

same companies that make some of the other

Usually a lot


Manufacturers do not have It has already covered them

to consider fixed costs
when calculating the price
for non-branded chips
Barrier to Entry

Something that makes it difficult for competitors to

enter the market and compete against you

Economies of scale can

You pass the savings in production efficiency onto
pose a significant barrier if the customer
Skimming with a higher
price would only

Encourage competition

Creating new Brands

When not operating at 100% capacity, create a new


Idle capacity:

When you have equipment, workers that are not

being used all the time. This is why many plants
operate 3 shifts. If youve got the building and the
equipment it is more profitable to keep producing
and selling, thus covering the fixed costs of that
equipment more quickly thus leading to more

Merging with competitors Usually results in: reduction in fixed costs.

Greater efficiency often

Less employees

Diseconomies of Scale

Although expansion can generate more profit, it

oftencentralizes management and causes
businesses to lose touch

Additional Factors Affecting Price

Laws to protect consumers


1. Price Fixing=Group pricing

2. retail Price Maintenance
3. Deceptive Pricing Practices
1. Double ticketing
2. Bait and switch
3. False sale prices


Manufacturers suggested retail price

Cannot legally be


Marketing boards play

important role in

Commodities (unbranded products)

Some have the power to


1. price

Price Positioning

1. premium

2. supply

2. discount
Consumer Demand

Its easier to start: high and lower

Not all products are

immune to

The effect of price increases

Competition: Forces sellers Remain close to one another

Internet access allows
consumers to

Find an assortment of prices for products all over the


If a business goes online

Its fixed costs are reduced substantially

What fixed costs can be

eliminated by having an
online store?

1. rent/mortgage
2. employees
3. advertising
4. inventory

Pricing Strategies

Pricing Strategy

3 pricing Strategies:

Plan too price a product to achieve a specific

marketing objective
1. skimming
2. penetration
3. competitive


Setting an initially high price before competitors

enter the market

Capitalize on


Good time to recover

R and D costs

Marketers sometimes use The cant produce enough

skimming to limit demand
List examples of products
and prices that reflect
these were actual prices at
one time

1. calculators-$399
2. vcr-$1500
3. dvd player-$800
4. mp3 player-$600

7.4 Pricing Policies

Leader Pricing

Low price to generate traffic-door crasher specials

Price Lining

Puts all products at one price in one place

Everyday Low Prices

Example of store: Walmart

Super Sizing

Adding a low cost product to increase its selling


Negotiated Pricing

Offer and counter offer

Negotiated Prices

1. cars
2. corporate stocks
3. houses

Interest Free Pricing

Allows consumers to own now and pay later

How does it work

Store sells contract to financial institution for a %

Combo Pricing/Bundling

Similar to supersizing, but discount price on one

item is part of package

Psychological Pricing

Tries to use knowledge of typical consumer

behaviour to forecast acceptable pricing

Return on Investment

Sell quickly, invest profits before having to pay for


Purchase Discounts(buying Price reductions for volume purchases or early

Factors affecting price of
goods sold in other

1. Tariffs
2. Transportation
3. currency
4. extra charges


Taxes used to protect domestic industries

Free trade

No tariffs