Product / Price / Promotion / Place
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Transcript of Product / Price / Promotion / Place
Product / Price / Promotion / Place
Marketing...
Price:
Price has many names…Price has many names…
Two key factors determine the priceof 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
MARKUPA 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…
MARGINThe 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 PROFITMoney left over after all “variable costs” have been paid.
businessgross 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
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 AnalysisHow 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 = $1.49Variable Cost = $0.35GP = Selling Price - VC
Therefore, $1.14 of Gross Profit is made with every sale of an Iced Cap
Breakeven AnalysisBreak-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 AnalysisThe 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 AnalysisSubway Pricing and BEP Example
Subway has the following costs for a “Footlong” assorted sub it sells:
Bread = $0.27Meat = $1.08Toppings = $0.20Expenses = $1.05 (includes all other VC )
Subway wants to make $2.40 per sub.
What should the price be?
$5.00Duh…!
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=$2.60What is the markup? $3.45As 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 = $0.27Meat = $1.08Toppings = $0.20Expenses = $1.05 (includes all VC)Subway MARKUP = $2.40Cost to customer = $5.00
Subway Pricing and BEP Example
Breakeven AnalysisSubway Pricing and BEP Example
So what is the BEP?
Assume Subway pays the following monthly Fixed Costs:
Wages $10,400 Rent $1,900 Hydro $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