Basics of Pricing

Price
- basics

last updated 2011 Feb 8

For the students of Prof. W. Tim G. Richardson, Toronto, Canada

Price proportionate to Quality
Consumer perceptions of the Quality and the price they are willing to pay
The text says "some consumer's perceptions of product and service quality vary directly with price. Typically the higher the price the better the quality is perceived to be".

However striving for high quality is not so simple, there are things you might have to give up. as Dilbert suggests

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In Marketing Information Products & Services, it is challenging to explain the FABs in order to describe different quality levels of a product - physical products, like a car, can be described in terms of cloth seats, leather seats etc. - so the higher or lower price can be easily understoo.

In Marketing Information Products & Services, it is incumbent upon the vendor to do more explaining about the things which make their product a quality product and there are different techniques for doing this such as
   o testimonials of existing customers
   o detailed description of the tech support
   o expanded descriptions of how to use advanced features of the service etc.

WTGR

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see TQM page at www.witiger.com/internationalbusiness/TQM.htm

"More managers are realizing that they should set prices by evaluating the effect of a price decision not only on the profit margin for a given item but also on demand..." p. 482 Shapiro

The reason for considering the impact of demand is due to the fact that the "Competitive Environment" greatly influences prices. In the REAL WORD it is very rare for you to do a simple math calculation and say "OK, this is our price based on fixed and variable costs" - you must take into consideration that somewhere somebody is selling something similar to what you are selling, and probably for a different price. Globalization is making the world an increasingly small space and as a consequence, the "Competitive Environment" is becoming more intense.

WTGR

Chapter 15

Price and
Productivity

..	The degree to which the Competitive Environment challenges your company to produce a product/service at a low price is the degree to which your company has to be highly productive or moderately productive WTGR

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Chapter 15

Trade Discounts
page 475

Pricing Terms used in B2B
2/10 - net 30
in a business to business (B2B) situation it is common to have to extend credit to customers who are buying parts, materials and supplies.
2 is the % discount
10 is the number of days
30 is the maximum number of days in which you HAVE to pay
2/10 net 30 means if you may before 10 days, you get a 2% discount

5/10 net 60
if I pay in 10 days I get a 5% discount and, I have to pay all of it before 60 days

Price Setting in the Real World - Most price structures are built around list prices
	In the "Real World", most manufacturers create a cost sheet for each product, then combining the cost sheets leads to a price list for a group of products. In the screen capture to the left you will see a real cost sheet used by a clothing manufacturing company - it is done in Excel so when various factors change, you can have the final cost calculation easily.
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	If you click on the screen capture to the left you will see a real price list which has been composed from cost sheets. This Price List is the basics from which all price objectives come from - its is from the numbers on this list that you increase by 10%, 20% or 50% your price

Markups
Markup percent is based on selling price

In the clothing industry it is usually 100% - this means if your calculated mfg. cost price of a garment is $20 - it will wholesale at $40, the retailer will mark it up to $80, or even $90 depending on the category.

"Mark-up Chain"
- the sequence of mark ups that a product goes through from producer to retailer.
- in some industries, the amount of increase is small, in some, like clothing, jewelry, the increase is enormous

"High markups don't always mean big profits"

Sometimes as the product passes from producer, to agent, to wholesaler, to retailer, there has to be a lot of advertising money spent at each level, which has to be recovered by the spender in a higher price passed on - this is particularly true for women's fashions, CD's, certain types of proceed foods and beverages, and specialty consumer products.

Sometimes the mark-up is very low cause there is not a lot of advertising needed and the competitive environment (particular international competition) keeps pressure ot have the final retail price low. This is true for certain types of products like building materials, some unprocessed food products (ie. bags of rice), and non-perishable items that are not sold with a lot of promotion. (ie. windshield washer fluid)

WTGR

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It is also important to note that the level of the mark-up depends on whether the product is a consumer product/service or an industrial product/service - BECAUSE,,,, consumer products/services often have more money spent on promotional expenses - therefore the need to recover this in a higher mark-up.

level of the mark-up depends on whether the product is:

Consumer Product

softdrink

Consumer Service

vacation

Industrial Product

screws, nuts and bolts

Industrial Service

advertising consulting fees

Stockturn rate (p. 485 Shapiro)

If you spend a lot of money to acquire inventory - it will cost you

cost you money you have to borrow from the bank to buy the materials to make the product
cost you money to pay the warehouse to store it
cost you money to pay your employees

which all means that as soon as you have created your inventory of product, you want to sell it as quickly as possible so you get money to pay back the people you borrowed from to get started, and pay your employees, and have some profit for moving forward.

One of the best things you can do is "turn over" your stock quickly. Once or twice a year is bad, four or five times a year is good. Cash flow is sometimes more important that an absolute profit. When you turn over the stock, you get cash flow.

Chpt 15

Total Costs

There are three kinds of total costs

Total Fixed Cost

- rent, utilities, agent commission, insurance

- things that do not change no matter how much you produce

Total Variable Cost

- material, supplies, component parts, wages and salaries, shipping

- things that increase, when you increase production

Total Cost

- the sum of Total Cost + Variable Cost

When marketing people sell, they sell based on the individual cost per unit, so this means the person doing this planning for selling must know the Average Cost per Unit. Basically, it is calculated by taking the Total Cost and dividing by the quantity - but in real life - this might often end up with an amount too low cause there is always other costs that did not get factored in to your Total Cost.

There are Three Kinds of Average Cost

Average Cost
Average Fixed Cost = total fixed cost divided by quantity
Average Variable Cost = total variable cost divided by quantity

The problem with Average Cost Pricing is it only works if you do indeed sell all the units. In many cases, this does not happen - so this means that your cost calculation will be incorrect and in fact the true cost will be higher.

If your Average Cost Pricing meant you had a cost of $10,000 to produce 2,500 garments then your cost per item would be $4 - so if you sold all 2,500 and, say $5, you would have a profit.

2,500 x $5 would be $12,500 - but, in truth, you may only sell 1,900 at $5 so your sales would be $9,500 - this means you have a loss.

Your cost was $10,000 - but you only sold $9,500, and you have 600 units left sitting in the warehouse.

So it would be better to sell them at $6 cause you have a safer chance of breaking even. - which leads us to the question of calculating how to break-even

WTGR

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