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Price Planning #2ObjectivesAnalyze costs and expenses to determine break even pointRecognize consumer perceptions based on priceConsider legal and ethical pricing issues
Break Even Point (BEP) – the point where sales revenue equals the costs and expenses of making and distributing a product.
Job One for any business is to know their break even point
Cost
s +
Expe
nses
per
uni
t
Revenue Generated
- Quantity Produced +
Amount above BEP = profit
ExpensesFixed + Variable
Consumer Perceptions based on pricePerception may or may not = reality!
High Price = High qualityHigh Price = Rip off!
Low Price = Poor qualityLow Price = Value
Odd / Even pricing conceptOdd number price = value. Example -
$199.99 Even number price = quality. Example -
$200.00
Legal & Ethical considerationsPrice Fixing – when competitors agree to certain price ranges. Legal?
Loss Leader – item priced at or below Break Even Point.
Legal?Price Discrimination – charging different prices to different customers in similar situations.
Unit Pricing – including price information for a standard unit of measure.
Legal?Yes – Required some places
Legal? Varies
AssignmentWork independently. Look at this scenario and then determine the pricing answers required. Your company is producing the latest cool gadget called a “thingamabob.” 1) Determine Break Even Point for a variety of manufacturing & sales volume levels
2) Using results from #1, determine price for each profit margin given
Sales Volume
VariableCost of goods
VariableSales Comm.
Fixed CostsRent, etc.
Total Costs(BEP)
Unit Cost = BEP ÷
Sales Volume
1000 $10,000 $15,000 $80,000
2000 $18,000 $32,000 $80,000
3000 $25,000 $48,000 $80,000
4000 $30,000 $70,000 $80,000
3) Answer this question: When might a company implement a variety of profit margins as shown here?
A – loss leader, sale item, clearance, promotion, etc.
Unit Cost 10% Margin(x 1.1)
25% Margin(x 1.25)
33% Margin(x 1.33)
