Factors of Pricing - Pricing Decision, Marketing Management Video Lecture | Marketing Management - B Com

welcome ladies gentleman today we're
going to take a look at determining the
price yes what to consider when you are
pricing your product in the market so
make sure get out your notes you follow
the storm philosophy sit back and enjoy
so what are we going to learn today well
we're going to take a look at the two
key components in determining the
products price then we're going to break
down this into various factors to
consider in your price calculation that
is your break-even analysis economies
and diseconomies of scale laws product
positioning consumer demand and
competition
so the two key components of determining
the price of your product has to do with
the cost of doing business and your
profit margin when you run a business
there's various costs involved and you
do make sure that every product that you
sell helps to cover those costs the
second one your profit margin that means
that every product you sell you hope to
achieve a certain amount of profit over
and above your cost in order to
contribute to your bottom line and
therefore stay in business a lot longer
so the first factor to consider is the
break-even analysis this analysis allows
you to determine how many products you
need to sell how many units in order to
cover all operating costs this point
right the amount of products you sell
hits a certain point and that point is
your break-even point how you determine
that break-even point depends on your
variable cost your fixed costs and your
gross profit which means once you have
calculated both variable and fixed costs
only then can you start calculating
profit and determining how many units
you need to sell in order to do so so
variable costs are dependent on the
quantity of goods or services sold these
costs are calculated on a per customer
basis or per unit basis so for instance
if you're a coffee retailer and you had
eight customers one day that might cost
you about two dollars and forty cents of
the cost of cups but the next day let's
say you're ten customers that might cost
you $3 worth of cups so this varies
based on the amount of customers and
your cost can rise and fall as such and
therefore variable costs include raw
materials ingredients cost of goods sold
sales commissions packaging material
cost maintenance costs and shipping
costs anything that can change on a day
to day basis
however some costs are not dependent on
the number of customers these can be
dependent on weather seasons management
decisions efficiency of workers rights
all these costs can change think about a
business that operates in the winter the
cleaning cost go way up some workers are
more productive than others you know it
may be in the afternoon versus the
morning or vice versa and some days of
the year some workers might be more
again productive you know think about
working on new year's day there's not
going to be a whole lot of productivity
going on in the work
so just like the name suggests fixed
cost these are fixed they don't change
their constant they're independent of
sales or any other variables and
therefore they remain constant
throughout the accounting cycle often
times a year rent insurance salaries
utilities administrative costs all these
do not change right throughout the
accounting cycle everyone's paid the
same wage it might change the next
accounting cycle but not in that one
accounting cycle
and so if you're a coffee retailer again
you pay the same monthly rent the same
for utilities for the most part the same
daily salary expense for each worker and
you know the same in terms of insurance
month to month it doesn't matter if you
have 8 customers one day or 10 customers
fixed costs remain the same so as
mentioned before you can only start
determining your profit once you've
calculated for your cost and the first
step in calculating your profit is gross
profit so this is the selling price
minus the variable cost it's what is
left over after you sell each cup of
coffee in order to pay for those fixed
costs and therefore we call this our
contribution margin so selling price
minus variable cost that amount of money
left over for each unit you can then add
that up altogether and see if that
covers your fixed costs and if it does
then you are going to be earning a nice
substantial profit so again going back
to the cup of coffee imagine each cup of
coffee only costs 10 cents to make for
the cup the water the lid the coffee
cream all that stuff and you sell that
cup of coffee for a dollar in 99 cents
therefore your gross profit for every
cup of coffee is a dollar and 89 cents
sell a million cups of coffee well you
do the math it's not a bad gross profit
to cover your fixed costs so this brings
us to the end of our breakeven analysis
the break-even point
so once you've calculated your variable
cost and you've covered these you only
have fixed costs remaining you calculate
your gross profit and therefore you
needed to determine how much you need to
sell in order to cover those fixed costs
so in order to calculate your break-even
point and determine the level of sales
necessary it
your fixed cost divided by your gross
profit
for instance imagine your gross profit
is a dollar and your fixed costs are a
hundred thousand well then you would do
a hundred thousand divided by one dollar
this means that you would need to sell a
hundred thousand units of coffee in
order to break that break-even point if
you are unable to reach that amount then
you need to either raise or lower your
prices to attract more people to buy in
therefore quantity or raise your prices
to increase your contribution margin
either way you need to make sure that
you will overcome that breakeven point
and begin to make a profit so the
break-even point is very important
obviously to calculate however there's
other things we need to consider the
first one is economies of scale this
means that the more product a company
makes the lower the cost of production
it becomes for each item think about you
run a factory and you produce one
computer well that computers going to
cost a lot because you're running an
entire factory to produce one computer
now if you produce a hundred thousand
computers the cost per computer is far
far less this is economies of scale now
even though it might be wise to increase
the production so that the cost per unit
comes down sometimes you can increase it
by too much if a bit firm becomes too
large this adds too much cost to cover
imagine you expand far too wide across
the globe well then you have all those
costs of operating all those retailers
across the globe that's a lot of money
and therefore it might become a
diseconomy of scale or you hire too many
employees to run a very small business
for example that's a diseconomy of scale
and that's going to impact your price as
well so another consideration for
businesses when they price their
products are the laws of the land
in Canada we have the Competition Act
this government act is used to protect
consumers against various pricing
practices of businesses such as
price-fixing this where businesses all
get together and decide on a very sneaky
price that they want to charge
that's not very competitive because
they're all acting as a whole that's not
very good for consumers they also part
of the ACT is the
suggested retail price the MSRP this is
what they suggest manufacturers list
their products as and suggest that the
retailer charge it can't force them to
but it tries to ensure that the
retailers respect the manufacturers
suggestions and various other deceptive
pricing practices such as double
ticketing where two prices on the
project are listed and the retailer
charges for the higher price the law
actually states they must charge for the
lower price or the bait-and-switch where
they advertise a lower price to get
consumers into the store and then get
them to pay for the higher price once
they're in the store or the false sales
price where retailers advertise regular
price as a sales price trying to attract
consumers all this is covered in the
Competition Act and therefore businesses
need to respect that another
consideration for pricing your product
is the products positioning in the
marketplace as you'll see later that
market skimming price penetration or
competitive pricing all determines your
price or helps to determine your price
and you don't want to go against your
position in the marketplace so if you're
offering a premium product you shouldn't
really offer it for a very cheap price
or a discount product for a very high
price next up consumer demand this is
the very basic law of supply and demand
with consumer demand consumers are only
going to pay what they're willing and
able to pay for the product so there's
no point to charge someone 3 dollars for
a product if they're not willing nor
able to pay for it you need to respect
the law of demand consumers are only
going to pay what they're willing and
able to last up is competition
competition is a great force and a great
factor to consider when you're pricing
your products you don't want to price
yourself out of the mark which means
charging a price that is far different
from your competitors who sell a similar
product you want a similar price for a
similar product and therefore you want
to be very competitive in the
marketplace so we reach our end what
factor is the most important to consider
is there one that stands out for your
product right for your industry for your
market or do you know of any companies
who have failed to recognize these
factors
many companies have if you fail to
consider these you will fail in the
marketplace alright so make sure you get
your notes in order and we'll see you
tomorrow