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Chapter 7
Pricing
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Name a product that you have recently
purchased.
How much did you pay for the product?
Why do you think it cost that much?
List as many reasons as possible.
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There are two key factors that determine
price:
1. The cost of doing business
2. The profit that a company hopes to make
from the sale of its product or service.
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Pricing Terms
1.
2.
3.
Markup – the amount of money added to the original cost of the product
to cover expenses and make a profit.
Cost + $ Mark-up = Price
($500 sofa + $300 Mark-up = $800
This method is best used for: services, high price/luxury items, i.e. cars,
furniture.
Margin – the percentage of the price of a product charged to the
consumer that is not used to pay for the costs of the product.
Cost + % Mark-up =Price
($50 muffler + 60% Mark-up = $80
$50 X .60 = $30
$50 + $30 = $80
This method is best used for a lot of different product/services i.e.
convenience store, auto parts store.
Profit – the amount of money left over from the sale of goods or services
after all expenses have been paid
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 Break-Even Analysis – calculates the break-even
point, which is the number of units that a business must
sell at a given price to cover its costs. To calculate the
break-even point you must first calculate the variable
costs, fixed costs, and gross profit.
Break-even Point (BEP) = fixed costs  gross profit
 Gross Profit – the amount of money made by a
company after it subtracts the variable costs of that
product from its selling price. Sometimes referred to as
the contribution margin.
Gross Profit = Selling Price – Variable Costs
 Variable Costs – costs that can go up or down
depending on the amount of product made or services
provided. (e.g., cost of raw materials or packaging)
 Fixed Costs – something that never changes
regardless of how many items are produced. (rent)
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Costs and revenue
$ 270,000
Break-even Point
$ 180,000
Fixed Costs: $150,000
Variable Costs @
$ 18,000
$3 per unit
1,000
10,000
15,000
Bears
Bears
Bears
Quantity Sold
Analysis: Notice how, as the quantity sold increases, the variable
costs increase, but the fixed costs stay the same. The business will
make profit if sales are above the Break-even point.
With the break-even point a business can
determine the level of sales necessary for
profit, the results of lowering or raising
prices, and the results of increased or
decreased sales.
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What can a business do to change the
BEP?
 Reduce the variable costs to increase the gross
profit and reduce the break-even point
 Increase the selling price to increase the gross
profit and reduce the BEP
 Decrease the selling price to increase demand;
higher sales might mean that the company can
reach the BEP more quickly
 Increase sales cost, such as advertising and
promotion, which may increase demand; higher
sales might mean that the company can reach
the BEP more quickly
 Reduce the fixed costs to reduce the BEP
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Calculating Profit: Gross Profit & BreakEven Point
Quantity
1
50
Total Fixed
Cost
$18,000
$18,000 $18,000 $18,000 $18,000 $18,000 $18,000
Total Variable
Cost
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100
1100
500
2200
1000
11,000
22,000
2000
10,000
44,000
220,000
Total Cost
$18,022 $19,100 $20,200 $29,000 $40,000 $62,000 $238,000
Fixed cost per
unit
$18,000
$360
$180
$36
$18
$9
$1.80
$22
$22
$22
$22
$22
$22
$22
$18,022
$382
$202
$58
$40
$31
$23.80
Variable cost
per unit
Total Cost per
unit
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ECONOMIES OF SCALE
 The more products a company makes the
lower the production costs for each individual
product. Marketers use economies of scale to:
1. Develop products for private-label companies
2. Create a barrier to entry for competitors
3. Create new brands
4. Merge with competitors
5. Develop new pricing strategies
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Economies of Scale
1.
2.
3.
4.
Developing Products for Private-Label Companies
- Example: The (store) brand of potato chips in any
major supermarket contains the exactly the same
potato chips as one of the brand named bags
Creating a Barrier to Entry for Competitors: doing
something that may discourage other companies from
launching the same type of product or service (pricing
the product/service at a very low price or having an
exclusive deal with a supplier.)
Creating New Brands – using the existing labour
force to create more then one item
Merging with Competitors- usually results in lower
fixed costs
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DISECONOMIES OF SCALE
Bigger is not always better. Some firms
may become too big. (The head doesn’t
know what the feet are doing)
Video
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Section 7.2
Additional Factors Affecting Price
1. Laws
2. Marketing Boards
3. Product Positioning
4. Consumer Demand
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Laws - the Canadian government has laws protecting
consumers against the following
Price Fixing – when competing businesses decide together
what to charge the consumers for a specific product.
Retail Price maintenance – the forcing of one company by
another to charge a certain price for a product they have
provided. (E. g. Manufacturer’s suggested retail price)
Deceptive Pricing Practices – fraudulent pricing techniques
used to attract the consumer in a dishonest manner. Such as:




Double ticketing – placing two prices on the same product
and charging the customer the higher price.

Bait-and-switch pricing – advertising a low price on a product
to attract customers and then trying to sell a more expensive
product.

False sale prices – advertising a regular price as a sale price.
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2. Marketing Boards
organizations that market particular
products, usually commodities (e.g., milk,
wheat, eggs); funded by the people who
produce these products. (Sometimes set
prices)
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Product Positioning
 Price is a major component of a product’s
image. The types of price positioning that can
be used are:
 Premium Pricing – used if a business positions itself as
a premium product. (luxury automobile, high fashion
dress, the product must be expensive)
 Discount Pricing – a price lower than a customer would
normally pay for a product. (Discount stores can charge
less because it has a lower fixed costs than a nondiscount store)
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Consumer Demand
How much are consumers willing to pay
Always easier to start high and lower
prices, then to start low and raise them.
Competition will also affect your price, if
there is no competition, then prices can be
higher if consumers are willing to pay that
price.
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Section 7.3
Pricing Strategies
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Pricing Strategy – a plan to price a
product to achieve specific marketing
objectives. Three possible strategies are:
1. Market Skimming
2. Penetration Pricing
3. Competitive Pricing
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Market Skimming
setting an initially high price for a product
or service before competitors enter the
market.
The business can reach the break-even
point quickly and recover development
costs, therefore in a great position to
lower the price if competitors enter the
market.
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Penetration Pricing
 Setting a low price to attract new customers.
 Effective, but risky, use when variable cost are
low.
Competitive Pricing
 Matching or coming close to the price at which
the competitor is selling its product.
 The battle for market share is fought with
advertising, promotion, distribution, or a
unique product feature.
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SECTION 7.4
PRICING POLICIES
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PRICING POLICIES
 Return on Investment
 Everyday Low Prices
 Purchase Discounts
 Super Sizing
 Negotiated Pricing
 Interest Free Pricing
 Leader Pricing
 Combo Pricing
 Psychological Pricing
 Price Lining
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1. Leader Pricing - offering a product at a lower price to
attract customers to the store.(Sobeys selling Pop for
$0.65)
2. Price Lining – putting a number of products together and
selling them for one price. (Ex. On a rack of T-shirts, that
cost $8, there may be T-shirts that cost the store $2& $3
with some that cost $4 & $5.)
3. Everyday Low Prices – a stores guarantee to customers
that the price they pay for items in the store is the lowest
possible price.
4. Super Sizing – adding a low cost to a product to
increase its selling price and profitability.
 100% profit for business
 Popcorn, pop
5. Negotiated Pricing – buyer makes and offer to purchase
and a seller makes an offer to sell. (real-estate, new
cars)
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6. Interest-Free Pricing – Free for one year.
7. Combo Pricing – deal on one part of the sale, high
profits on the other part. (buy a 99-cent hamburger, but
you must buy drinks and fries too.)
8. Psychological Pricing – using typical behaviour traits to
determine product pricing. (odd-cent pricing, even-dollar
pricing)
9. Return on Investment – the percentage of profit a store
owner realizes each year on the capital invested in the
store.
10. Purchase Discounts – price reductions in goods or
services offered by the seller to the buyer to increases
the volume of an order.
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Section 7.5
Pricing for the International
Market
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Factors affecting pricing in international
markets:
1. Tariffs – taxes levied by governments on
imported goods. Imposed to protect
domestic industries from low priced
imports.
2. Transportation Costs
3. Currency Values
4. Extra Charges –(special insurance,
other taxes, translation and packaging
costs.)
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