Download Objective 3.03 Employ Pricing Strategies to Determine Prices

Part I
a.
b.
c.
d.
Identify types of pricing objectives.
Explain reasons for setting pricing objectives.
Describe ways in which pricing objectives
are used.
Demonstrate procedures for establishing
pricingobjectives.
Pricing objectives
Survival
 Prices are flexible. A company can lower
them in order to increase sales enough
to keep the business going. The
company uses a survival-based price
objective when it's willing to accept
short-term losses for the sake of longterm viability.

Profit
 Price has both direct and indirect effects on
profit. The direct effect relates to whether
the price covers the cost of producing the
product. Price affects profit indirectly by
influencing how many units sell. The
number of products sold also influences
profit through economies of scale -- the
relative benefit of selling more units. The
primary profit-based objective of pricing is
to maximize price for long-term profitability.

Sales
 Sales-oriented pricing objectives seek to
boost volume or market share. A volume
increase is measured against a company's
own sales across specific time periods. A
company's market share measures its
sales against the sales of other companies
in the industry. Volume and market share
are independent of each other, as a
change in one doesn't necessarily spur a
change in the other.

Status Quo
 A status quo price objective is a tactical
goal that encourages competition on
factors other than price. It focuses on
maintaining market share, for example,
but not increasing it, or matching a
competitor's price rather than beating it.
Status quo pricing can have a stabilizing
effect on demand for a company's
products.

What is a pricing objective?

A goal that guides a business in setting the cost
of a product or service to potential consumers.
A pricing objective underlies the pricing process
for a product, and it should reflect a company's
marketing, financial, strategic and product
goals, as well as consumer price expectations
and the levels of available stock and production
resources.
6 Steps to Setting a Price
Strategy for your Business
1.
2.
3.
4.
5.
6.
Select the pricing objective to decide where
you want to position your market offering.
Determine the demand.
Estimate the costs.
Analyze competitor costs, prices, offers and
possible reactions.
Select a pricing method.
Finally, select the price
Part II
a.
b.
c.
d.
e.
f.
Identify examples of fixed expenses.
List examples of variable expenses.
Cite examples of mixed/semi-variable
expenses.
Explain the importance of break-even in
setting prices.
Calculate the break-even point for a product
in units.
Calculate the break-even point for a product
in dollars.
What Is the Break-Even Point?

A business reaches its break-even point
when its total sales income at a given
selling price equals its total costs. In
other words, the business breaks even
when it makes as much as it has spent
to produce and/or sell its product(s). The
business must calculate its total costs
and estimate its sales revenues to
project the point at which it will break
even.
Components of Break-Even
 Costs
 Fixed costs
○ Are fairly predictable business costs that don’t
change when sales go up or down
○ Tend to stay the same, no matter how many
products the business produces or sells
○ Examples: taxes, rent or mortgage payments,
equipment payments or leases, wages and
salaries, depreciation of physical assets, fees
and licenses, interest on loans, insurance, etc.
 Variable costs
○ Are costs that change along with changes in
sales volume
○ Examples: cost of goods, promotional costs,
sales tax, raw materials, business travel, sales
commissions, etc.
○ Can be predicted only if the business can
make a fairly accurate estimate of what its
sales volume will be
 Semi-variable costs
○ Vary to some extent in response to sales
○ Should be assigned as either fixed or variable
for the purpose of calculating break-even
(assigning semi-variable costs to the fixedcost category results in a higher, more
conservative break-even point)
 Sales revenues
 Most businesses receive the bulk of their
income from sales revenues, money
received from sales of goods and
services.
 There are two ways that sales revenues
increase:
○ Sales revenues increase as the number of
units sold increases.
○ Sales revenues increase as the selling price
per unit increases.
 Profit
and loss
 A business does not make a profit until it
has passed the break-even point—when
total sales revenues are greater than
total costs.
 A business loses money if it does not
reach its break-even point and sales
revenues are less than total costs.
Why Calculate Break-Even?

Calculating the break-even point can
serve a number of purposes for a
business. The most important reason for
calculating the break-even point is to
determine at what point the business
can expect to begin making a profit.
Calculating break-even can also help
the business to make important
decisions, such as:

Setting prices
 Most marketers consider more than one
possible selling price for a product before
setting a final price.
 Calculating break-even helps a business to
estimate the number of products it would
expect to sell at each price.
 Calculating break-even for estimated sales
at each selling price helps the business to
select the most appropriate price.

Relocating the business
 Calculating break-even can help businesses
determine whether moving to a new location
would benefit them.

Determining capital needs
 All businesses need capital, or money, with
which to operate.
 A business should not borrow too much
money because the interest it must pay on
the amount borrowed will increase its
expenses.
 A business also should not set aside too
much of its capital for business operations
because the money will not be available for
other uses, such as buying goods for resale.
 Calculating break-even helps a business to
borrow or to set aside appropriate sums.
 Offering
incentives
 Some businesses offer incentives such
as bonuses or sales commissions to their
employees to motivate them to do a good
job.
 These businesses need to know what
they can afford to spend before they offer
these incentives.
Calculating Break-Even

A basic formula for calculating breakeven for a product is:

BP = FC ÷ VCM

BP—break-even point
FC—total
fixed costs
VCM—variable-cost
margin

Putting the formula into words, breakeven point equals total fixed costs
divided by the variable-cost margin.

The variable-cost margin is the amount
that each sale contributes to fixed costs.
It is also called the fixed-cost
contribution. Variable-cost margin is
calculated by subtracting variable costs
per unit from the selling price per unit.
Break-Even in Units

Calculating break-even in units
determines how many products a
business must sell to break even. Let’s
see how this might work for a hot dog
vendor at the baseball park:
The vendor’s fixed costs include a $25
license and $100 for equipment rental.
 Variable costs are estimated to be $50
for twelve dozen (144) hot dogs and
buns, as well as condiments.
 The hot dogs will sell for $1.50 each.
 How many hot dogs will the vendor need
to sell to break even?

 Determine total fixed costs by adding the
two fixed costs together:
 $25
+ $100 = $125
 Determine variable costs per unit by
dividing the variable costs by the number
of units:
 $50
÷ 144 = $0.35
 Calculate variable-cost margin by
subtracting the variable cost per unit from
the selling price:
 $1.50
- $0.35 = $1.15
 Therefore, using the break-even formula,
BP = FC ÷ VCM, we find:
 BP
= $125 ÷ $1.15 = 108.7
 The vendor must sell 109 hot dogs to
break even and begin making a profit.
Break-Even in Dollars





Break-even can also be expressed in dollars:
After you calculate the number of units you
need to sell to break even (109 for the hot dog
vendor), multiply that number by the selling
price per unit ($1.50 for each hot dog).
This figure is the total dollar sales you need to
make to break even.
In the case of the hot dog vendor, s/he needs
to make $163.50 in sales to break even:
109 × $1.50 = $163.50
Steps for Calculating Break-Even
The steps to calculating break-even include:
 Identify costs and revenues.
 Classify costs as fixed or variable.
 Total the costs in each classification.
 Calculate the variable cost per unit.
 Subtract the variable cost per unit from the
selling price per unit to obtain the variablecost margin.
 Divide the total fixed costs by the variablecost margin to determine break-even point.

Part III








a. Identify strategies for pricing new
products.
b. Select product-mix pricing strategies.
c. Determine discounts and allowances
that can be used to adjust base prices.
d. Adjust base prices using psychological
pricing techniques.
e. Select promotional pricing strategies.
f. Select geographic pricing strategies to
adjust base prices.
g. Identify segmented pricing strategies.
h. Demonstrate procedures for selecting
appropriate pricing strategies for
products.
New product Pricing Strategies
Penetration pricing in the introductory
stage of a new product's life cycle
involves accepting a lower profit margin
and pricing relatively low.
 Price skimming involves setting the price
relatively high to generate a high profit
margin.
 A premium product generally supports a
skimming strategy.


Product Mix Pricing Strategies

The product mix is the collection of
products and services that a company
chooses to offer its market. Pricing
strategies range from being the cost
leader to being a high-value, luxury
option for consumers.




Cost Plus
Cost-plus pricing is the most basic type of pricing
and simply represents setting the cost of a product
at some level above the cost of producing and
distributing that product. So, for instance, a jeweler
might decide to price products at a 100 percent
mark-up based on the costs that go into creating the
product.
Competition Based
Competition-based pricing is pricing that is
established specifically to address and respond to
the prices of competitors' products. Businesses may
decide to price either higher or lower or at about the
same levels of the competition, but their decisions
are based on an evaluation of what competitors are
doing and how they want to position their product
mix.
Discounts and Allowances
Clearance Markdowns to get rid of slowmoving, obsolete merchandise
 Promotional Markdowns

 To increase sales and promote merchandise
 To Increase traffic flow and sale of
complementary products generate
excitement through a sale

To generate cash to buy additional
merchandise
There are five basic types of
psychological pricing strategies.

Odd-even pricing is a strategy of setting
prices in odd numbers just below an
even price, for example pricing an item
at the odd $19.95 rather than the even
price of $20.00. The intention of oddeven pricing is to make the price appear
considerably lower than it is.

Prestige pricing works on the opposite
premise; rather than making prices
seem low, prices are inflated in order to
create a sense of greater value. For
example, a wine might be priced at $20
per bottle rather than $12 merely to give
the impression that it is a better product.

Multiple pricing is a psychological pricing
strategy in which items are bundled
together, such as two for $5 rather than
$2.50 per item. This strategy creates a
sense of value and can help boost sales
volume by encouraging the purchase of
multiple items.
Promotional pricing is the psychological
pricing strategy in which a price is
temporarily lowered in order to attract
customers.
 Price lining is an effective form of
psychological pricing for companies with
an extensive product line; it involves
creating a price range for a particular
line, for example a budget clothing line
with items all priced below $10.

Geographical Pricing.

Geographical pricing sees variations in
price in different parts of the world. For
example rarity value, or where shipping
costs increase price. In some countries
there is more tax on certain types of
product which makes them more or less
expensive, or legislation which limits
how many products might be imported
again raising price.
Segmentation Pricing

If you plan a product segmentation
strategy, you may incur higher product
development or manufacturing costs to
create different versions, so it is important
to focus on segments where you can make
a profit. Price segmentation enables you to
offer the same basic product, but add
features that customers are willing to pay
for or remove cost elements that are not
important to customers.
Part IV
a. Define the following terms: floors,
ceilings, and elasticity.
 b. Describe the importance of
determining pricing floors and
ceilings.
 c. Explain process for setting prices.
 d. Estimate demand for product.
 e. Implement process for setting prices.

Price Ceilings and Floors

Price ceiling is the highest price that is
allowed to be charged for a certain good
or survive in an economy, while the price
floor is the lowest possible price
Setting Prices
Your event must have a high-enough price to
cover the costs of your event, as well as to
provide you a revenue stream, if you're
expecting to make a profit from the event
attendance itself
 The price of your event determines, in part,
the venue that you select. You shouldn't
charge thousands of dollars for an event and
host it in a 'budget' venue. Conversely, you
need to charge enough that your event price
covers the cost of your venue and other event
costs.


Demand forecasting is the activity of
estimating the quantity of a product or
service that consumers will purchase.
Demand forecasting involves techniques
including both informal methods, such
as educated guesses, and quantitative
methods, such as the use of historical
sales data or current data from test
markets
Demand forecasting may be used in
making pricing decisions, in assessing
future capacity requirements, or in making
decisions on whether to enter a new
market. Is the demand elastic or inelastic.
Elastic means that if price changes,
demand changes. Inelastic means
demand will not change if price changes.