Chapter 12 Mini Stim Exercise: Pricing Stretegies and Objectives
Decision Point: Calculating Breakeven Before recommending a price, you need to gain an understanding of your client's costs in producing the soap. She gives you the following information: Fixed costs (rent, insurance, utilities): $10,000 annually Variable costs (raw materials, production, shipping): $2.00 per unit She thinks that she might be able to sell the soaps for $4-$5 and wants to have an idea of how many soaps she would need to sell in order to break even. At a selling price of $5, how many units would your client need to sell in order to break even?
3,333 That was the best choice. The breakeven point is calculated as: Total Fixed Cost / Price - Variable Cost In this case, $10,000 / ($5 - $2) = 3,333 units.
Decision Point: Recalculating Breakeven Your client seems relieved with this figure. "That's actually better than I thought," she confesses. "But how would that number change if I only charged $4 per unit?" You run a quick calculation and give her the news. If she sells the soap for $4, she'll need to sell _______ units in order to break even.
5,000
Decision Point: Alternatives to Lowering the Price Your client doesn't want to lower the price on The Boss and asks you to come up with some other ideas to extend the life of the product. What other strategies could you suggest? Select an option from the choices below and click Submit.
Consider bundling the sound bar with a wireless subwoofer. That was the best choice. A customer might be enticed to buy the sound bar/subwoofer combo if the combo price is lower than what those components would cost individually... and you've increased the amount of the sale!
The life cycle for both goods and services is a natural process in which products are born, grow in stature, mature, and finally decline and die. Maturity is typically the longest stage in the product life cycle (PLC) for many products. Sales growth peaks, and then starts to slow. Increased competition eventually forces price cutting, increasing the costs of advertising and promotional expenditures, and lowering profits. Toward the end of the stage, sales start to fall. Some products that have reached the maturity stage are Levi's jeans, Campbell's soup, and Coca-Cola. Let's consider products in various life cycle stages.
Did you place the items correctly into the product life cycle?Growth: Uber, Activity wristbandMaturity: Milk, LaptopDecline: Flip phone, TypewriterDid you place the items correctly into the product life cycle?Growth: Uber, Activity wristbandMaturity: Milk, LaptopDecline: Flip phone, Typewrit
Did you place the items correctly into the product life cycle?Growth: Uber, Activity wristbandMaturity: Milk, LaptopDecline: Flip phone, TypewriterDid you place the items correctly into the product life cycle?Growth: Uber, Activity wristbandMaturity: Milk, LaptopDecline: Flip phone, Typewrit
Drop the price to sell out the supply. This was the best choice and allows the company to drop the product line when its inventory is depleted.
Decision Point: Your Second Meeting: Furniture Your next client is a retailer of ready-to-assemble furniture. He's sent you the following report: Easy Lifestyle Furniture Popular ready-to-assemble bedroom, living room, and office furniture. Three store locations in the state as well as online sales. Product line has been on the market for 2 years. Sales are steady, but untapped sales potential exists. Heavy marketing efforts have already taken place. Pricing is at or near market prices for competitors' products. What should you recommend to increase sales?
Keep prices the same but provide additional services such as free delivery and financing options. That was the best choice. Adding services (like free shipping and/or assembly) and financial incentives (like interest-free financing for 6 months) will draw people into the store.
Decision Point: Your Third Meeting: Home Theater Sound Bar Your next client sells a home theater sound bar. When the product was first introduced, its performance was unmatched and it took the market by storm. However, over the last couple of years, the competition has caught up. It's still profitable and has good brand recognition, so the company wants to keep it on the market, but market share is lagging. You've been sent the following report: The Boss Sound Bar On the market 3 years Lacks some features of newer, more sophisticated (but pricier) models Still profitable, but high initial sales have tapered off and market share is sagging Several competitors have entered the market Current price: $399 Competitors have similar units on the market for $289 to $649. What price would you recommend to your client?
Lower the price to $359. It's still priced less than some of the competitors, even if it doesn't have all the features. That was the best choice. During the maturity stage of the product life cycle, increased competition eventually forces price cutting, and market share leadership may outweigh profit as a pricing objective, so this is a good option. However, it would take some research to determine whether the company can still make a profit at this price.
Learning Objectives At the end of this exercise, you should be able to: LO 12.5 : Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices. LO 12.4: Identify the various pricing objectives that govern pricing decisions and describe the price-setting tools used in making these decisions. LO 12.3: Describe the stages of the product life cycle (PLC) and methods for extending a productÕs life Scenario Youre a consultant who helps business clients price their products competitively. How well you help them succeed sets your bonus for the year. You have a full docket of appointments today. If everyone leaves happy, youll have made the revenue to hit your bonus. Can you make it happen? Click Next to begin your challenge. Good luck!
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Mentoring Moment: Pricing Objectives Pricing objectives are the goals that sellers hope to achieve in pricing products for sale. Companies with a profit-maximizing objective want to set a price that will yield the highest possible total profits. If a company sets prices too low, it will probably sell many units but may miss out on additional profits on each sale. It's not about how many you sell; it's about how much you make on each sale. However, it's a balancing act. If a company sets prices too high, it may make a large profit on each item but will sell fewer units, and it may also be left with excess inventory. Other companies may be willing to accept minimal profits, even losses, to get buyers to try products. They initially set low prices for new products to establish market share (or market penetration), a company's percentage of the total industry sales for a specific product type. Once again, however, it's a balancing act. In the long run, a business must make a profit to survive.
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Mentoring Moment: Pricing Strategies Pricing a new product is one of the most important -- and most difficult -- decisions a company can make. Although many factors have to be taken into consideration, there are generally two strategies: price skimming and penetration pricing. Let's take a look. Price skimming, setting up an initial high price to cover development and introduction costs and generate a large profit on each item sold, works... but only if marketers can convince customers that a new product is truly different from existing products and there is no foreseeable major competition on the horizon. The tech industry has used this strategy with great success. Tech companies charge the highest price they know (or think) customers will pay when a product is first introduced. As demand drops, so does the price. Penetration pricing involves setting an initial low price to establish a new product in the market. The goal is to create customer interest and stimulate trial purchases. Walmart may be the poster child of penetration prices. It prices almost all of its items aggressively in order to sell as many as possible, trading profit margin for quantity.
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Decision Point: Choosing Your Price Your next step before recommending a price is to determine what customers may be willing to pay. Your client tells you that the market research she has done on this product suggests that the maximum price customers would be willing to pay for the soap is $6. Let's see what happens to the anticipated sales volume at different price points: Price Anticipated Sales During the First Year (Units) $36,000$45,000$54,000$62,000$7.50500 What price should you recommend to your client?
Price the soap at $5.00. This was the best choice. According to the breakeven analysis you performed, your client would need to sell only 3,333 units before she started earning a profit, so if your client wants to pursue a profit-maximizing objective, this may be her best bet. A profit-maximizing objective aims to establish a price that will yield the highest possible profits (even at the expense of market share).
Decision Point: Your First Meeting: Crystal Soaps Your first client has a unique crystal-like soap set to launch. She's sent you the following information: The Crystal Soap Next-generation soap Set to go to market this month Took time to develop, test for safety, and work out production problems No current competitors Crystal Soaps wants your help in setting an initial price for its products to ensure a dramatic launch. Your client is convinced that this new product is truly different from anything else on the market, and she tells you that she doesn't see any competitors on the horizon for the foreseeable future. Based on this information, which of the following should you recommend to your client to capitalize on the situation?
Pursue a price skimming strategy. This was one of the best choices. Price skimming involves setting an initial high price to cover development and introduction costs and generate a large profit on each item sold. It can be a good strategy while there are no competitors on the market. However, before setting a price, your client needs to fully understand its costs and how much customers might be willing to reasonably pay for the product.
Decision Point: How to Persuade Your Customer to Follow Your Advice You have advised your client that he should keep the price unchanged and provide additional services to customers such as free delivery and/or assembly, and financing options like no interest for 6 months. Your client has expressed reservations about this course of action. Which of the following, if true, would be most likely to encourage your client to take your advice?
Several competing stores and online furniture stores offer similar services for customers. That was the best choice. If competing stores or online stores offer free delivery and/or assembly or interest-free financing, your client should consider doing the same to stay in the market.
Breakeven analysis sounds complicated, but it's not. In its simplest terms, breakeven analysis lets you know how many units you need to sell in order to cover your costs. It uses only three simple pieces of information - fixed costs, variable costs, and price per unit. In producing a product, a firm has both fixed costs and variable costs. Fixed costs are costs that must be paid regardless of how many units are produced and sold. Variable costs, on the other hand, fluctuate directly with sales volume. The more you produce, the higher your variable costs. Let's try this out. Using your client's crystal soap business, indicate which costs are fixed and which are variable by dragging them onto the correct side of the ledger.
That's correct. Fixed costs are costs such as rent or mortgage payments, insurance, utilities, and salaries. Variable costs would include raw material, production supplies, packaging, shipping, and commission. Once you have the cost data (both fixed and variable) and a target price (i.e., what you would like to charge for the product), all you need to do is plug those numbers into the formula: Fixed Costs = Breakeven PointPrice - Variable Costs
Decision Point: Why You Shouldn't Lower the Price You've recommended that Alan drop the price of the RC helicopter to sell out the remaining inventory. Which of the following, if true, suggests that reducing the price to sell out the remaining stock is not a good idea?
Your client's main competitor has just increased the price of its RC helicopter. That was one of the best choices. If the main competitor has just increased its prices, your client doesn't need to reduce prices. He may be able to take advantage of increased sales by virtue of the fact that his RC helicopter is now priced lower than the competition.