Cost based pricing rules
Download
1 / 67

Cost Based Pricing Rules - PowerPoint PPT Presentation


  • 152 Views
  • Uploaded on

Cost Based Pricing Rules. Ted Mitchell. Pricing Two Views. 1. We give you a good price Price Is Relative To Competition 2. We ask for this in exchange Price = Product + Place + Promotion Price Is A Reflection of Value. There are Price Setters and Price Takers.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Cost Based Pricing Rules' - owen-ramsey


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Pricing two views
Pricing Two Views

1. We give you a good price

Price Is Relative To Competition

2. We ask for this in exchange

Price = Product + Place + Promotion

Price Is A Reflection of Value


There are price setters and price takers
There are Price Setters and Price Takers

A basic idea of marketing is to make your product sufficiently better than your competitors’ product from the customer’s point of view and not to be a price taker.


Pricing goals
Pricing Goals

  • Profit

    • long run, short run

  • Sales Revenue (Growth)

  • Market Share (Penetration)

  • Unit Sales Volume (Learning Curve)


Pricing goals cont d
Pricing Goals Cont’d

  • Image Maintenance

  • Cash Flow (survival)

  • Competitive Pricing (Stability, Price leader, price taker

    • Avoid price competition


Basics c s for pricing
Basics C’s for Pricing

Costs of making the product, etc.

Customer Demand

Competitors


Pricing methods formulas
Pricing Methods (Formulas)

  • Cost Based Methods

  • Demand Based Methods

  • Competitive Based (Going Rate, Bidding) Pricing



Why cost based pricing four reasons
Why Cost Based PricingFour Reasons

1 Fair

2 Easy to Calculate

3 Industry Stability

4 “guarantee a profit”


Types of cost based methods
Types of Cost Based Methods

  • Cost Plus (profit)

  • Traditional Markup (Discount rate)

  • Target Return on Investment

  • Discounts & Allowances


Some costing is crude
Some Costing Is Crude

  • Direct Materials plus

  • Direct Labor plus

  • 300% of Direct Labor (to cover Fixed Costs) plus

  • A 50% Markup plus

  • Competitive adjustment plus

  • What the customer will bear




The basic cost based pricing formula is
The Basic Cost BasedPricing Formula is

Price Formula Comes From The Basic Profit Formula

Z = (P - V)Q - F


Calculate the price

Calculate the Price

Knowing Cost and Profit Targets



Learning curve
Learning Curve Learning Curve

Variable Cost Per Unit Is Reduced As Experience In Its Production Is Learned


Learning curve1
Learning Curve Learning Curve

V

Production Experience


Learning curve2
Learning Curve Learning Curve

V

Production Experience


Learning curve3
Learning Curve Learning Curve

V

Cumulative



Variable cost is not unit cost
Variable Cost Is Of Modern Pricing Strategy!Not Unit Cost

UNIT COST COMBINES

AVERAGE FIXED COSTS

AND VARIABLE COSTS


Basic cost based pricing formula is
Basic Cost Based Of Modern Pricing Strategy!Pricing Formula is

Substitute Unit Cost


Example
Example Of Modern Pricing Strategy!

“We charge what it costs to make each unit plus a standard approved markup of 10% for our profit.”


Example1
Example Of Modern Pricing Strategy!

“We charge what it costs to make each unit plus a standard approved markup of 10% for our profit.”

Unit Cost is considered the cost to make each unit in a pricing formula


Profit is being measured as a percentage of sales revenue. Of Modern Pricing Strategy!

Substitute


Profit is being measured as a percentage of sales revenue. Of Modern Pricing Strategy!

Substitute


Simplify Of Modern Pricing Strategy!

Substitute


Example2
Example Of Modern Pricing Strategy!

“We charge what it costs to make each unit plus a standard approved markup of 10% for our profit.”


Classic Cost Plus Formula Is Of Modern Pricing Strategy!

P = Unit Cost + x% of Final Price

P = Unit Cost + x(P)

P - xP = Unit Cost

(1-x)P = Unit Cost

P = Unit Cost

(1- x)


Classic Cost Plus Formula Is Of Modern Pricing Strategy!

Note: we use unit cost and a target profit margin

P = Unit Cost + x% of Final Price

P = Unit Cost + x(P)

P - xP = Unit Cost

(1-x)P = Unit Cost

P = Unit Cost

(1- x)


Types of cost based formulas
Types of Cost Based Formulas Of Modern Pricing Strategy!

  • Cost Plus (Profit)

  • Traditional Markup Pricing

    (Discount rate)

  • Target Return on Investment

  • Discounts & Allowances


Markup pricing
Markup Pricing Of Modern Pricing Strategy!

  • Very Popular with Retailers

  • It uses the purchase cost of the merchandise which is the Variable cost.

  • The Target Markup which includes the fixed costs and the target profit.


We remember that
We remember that Of Modern Pricing Strategy!

  • The target markup for a target profit was

  • Mp* = (F+Z)/ R

  • We consider Mp*(R) = F+Z and substitute into

  • PQ - vQ = F+Z

  • PQ - vQ = Mp*(R)

  • and substitute R = PQ

  • (P-V)Q = Mp*PQ

  • P-V = Mp*P

  • P-Mp*P = V

  • P = V / (1-Mp*) is markup pricing


Another way
Another Way Of Modern Pricing Strategy!

  • Consider the breakeven price with a target profit

  • P = V +(F+Z)/Q

  • Divide both sides by P

  • (1/P)P = V/P + (F+Z)/PQ

  • Where (F+Z)/PQ = Mp = Target markup

  • 1 = V/P +Mp

  • (1-Mp)P = V

  • P = V/(1-Mp)



Markup pricing1
Markup Pricing Of Modern Pricing Strategy!

  • Remember the markup pricing is to cover the total contribution needed to cover the Fixed Costs and the Target Operating Profit!


Types of cost based formulas1
Types of Cost Based Formulas Of Modern Pricing Strategy!

  • Cost Plus (Profit)

  • Traditional Markup Pricing

    (Discount rate)

  • Target Return on Investment

  • Discounts & Allowances


Calculating A Price From A Cost Based Formula Is Easier Of Modern Pricing Strategy!If They Give You A Target Return or Profit Z in dollars



Example target profit pricing formula a expected profit of 15 roi
Example: Target Profit Of Modern Pricing Strategy!Pricing FormulaA Expected Profit of 15% ROI


Example target profit pricing formula a expected profit of 15 roi1
Example: Target Profit Of Modern Pricing Strategy!Pricing FormulaA Expected Profit of 15% ROI


Example target profit pricing formula a expected profit of 15 roi2
Example: Target Profit Of Modern Pricing Strategy!Pricing FormulaA Expected Profit of 15% ROI


Target returns profits where do they come from
Target Returns (Profits) Of Modern Pricing Strategy!Where Do They Come From?


Sources of targets
Sources of Targets Of Modern Pricing Strategy!

  • 1 Deciding What Seems Fair

  • 2 Wanting A Better Return Than Last Year

  • 3 Establishing What They Believe They Can Get

  • 4 Estimated Cost Of Capital

  • 5 Wanting To Stabilize Prices


Types of cost based formulas2
Types of Cost Based Formulas Of Modern Pricing Strategy!

  • Cost Plus (Profit)

  • Traditional Markup Pricing

    (Discount rate)

  • Target Return on Investment

    • Weakness Of Cost Based

  • Discounts & Allowances


Basic cost based pricing formula is1
Basic Cost Based Of Modern Pricing Strategy!Pricing Formula is


Basic cost based pricing formula is2
Basic Cost Based Of Modern Pricing Strategy!Pricing Formula is

Where Does The Q Come From?


Q can come from
Q Can Come From Of Modern Pricing Strategy!

  • Target Level Of Desired Production

    Percent Of Normal Capacity

  • Sales Forecasts


Cost Structure is Very Important Of Modern Pricing Strategy!

Total Cost

Dollars

Fixed Cost

Quantity Produced


#1 Percentage Of Normal Capacity Of Modern Pricing Strategy!

Often Becomes The Bases

For Expected Sales = Q!

Total Cost

Dollars

Fixed Cost

85% of Capacity


#2 Forecasting The Quantity That Will Be Sold From Simple Projections Of Past Sales Is Popular

Time


To cost based pricing you need to know
To Cost Based Pricing Projections Of Past Sales Is Popular You Need To Know

Variable cost , Fixed cost, Target Profit, & Estimate of Future Sales

or Production = Q


The fundamental weakness of cost based pricing is
The Fundamental Weakness Of Projections Of Past Sales Is Popular Cost Based Pricing Is


The fundamental weakness of cost based pricing is1
The Fundamental Weakness Of Projections Of Past Sales Is Popular Cost Based Pricing Is

Using An Expected

Sales Forecast, Q,

To Select The Price


Why? Projections Of Past Sales Is Popular

Because Price is Key Factor in Causing Sales

Revenue = f(Price, Promotion, Place, Product)

Price Causes Sales!


Remember
Remember Projections Of Past Sales Is Popular

  • The Expected Quantity Of Sales Should NOT Set The Price.

  • The Price Determines The Quantity!


Remember1
Remember Projections Of Past Sales Is Popular

  • The Expected Quantity Of Sales Should NOT Set The Price.

You Need Sales Estimates Based On The Demand At The Planned Price (i.e. Demand Based Pricing)


Types of cost based formulas3
Types of Cost Based Formulas Projections Of Past Sales Is Popular

  • Cost Plus (Profit)

  • Traditional Markup Pricing

    (Discount rate)

  • Target Return on Investment

    • Weakness Of Cost Based

  • Discounts & Allowances


Discounts allowances
Discounts & Allowances Projections Of Past Sales Is Popular

  • Cash Discounts

  • Trade Discounts

  • Quantity Discount

  • Rebates (Cumulative)


Discounts allowances1
Discounts & Allowances Projections Of Past Sales Is Popular

Everything Is A Percentage Off Catalog List Prices

Importance Of Catalog And Pricing Sheet Updates


Cash discount
Cash Discount Projections Of Past Sales Is Popular

3% /10 net 30

  • Encourage prompt payment

  • Reduce cost of credit

  • Industry standard


Trade or functional discount
Trade Or Functional Discount Projections Of Past Sales Is Popular

Straight Percentage Off List

  • Pay For The Functions A Middleman Performs

    • Class A or B Distributor

    • OEM

    • Educational

    • Government


Quantity discount
Quantity Discount Projections Of Past Sales Is Popular

  • Must Be Offered To All Customers

  • Must Demonstrate Cost Saving Being Passed On


Rebates allowances
Rebates & Allowances Projections Of Past Sales Is Popular

  • Cumulative

  • Competitive Rebates (software)

  • Seasonal

  • Advertising Allowances

  • Case Allowances


Shipping costs
Shipping Costs Projections Of Past Sales Is Popular

  • FOB origin

  • FOB Destination

    • Phantom Freight

    • Postage Stamp Pricing


Cost based pricing does
Cost Based Pricing Does Projections Of Past Sales Is Popular

  • Not Guarantee Demand

  • Not Guarantee A Net Profit

  • Not Simplify e.g. Managers Confused About Costs

    • Unit cost versus variable cost

    • Sunk costs vs fixed cost

    • Discretionary


ad