| Supply Chain Management |
Pricing Strategy
Recommend value-driven pricing for your company’s product.
⦁ Estimate the Break-Even Point (BEP) for your company’s product. What pricing implications does your BEP present for achieving a short- or long-term ROI?
⦁ What is the best pricing strategy for your product and why?
Product: Vegan Leather
Company: Zara
Notes
⦁ Break-Even Point (BEP)
⦁ Before we shift our focus to the next strategy, competition-based pricing, this is a good place to cover the financial concept of break-even point (BEP) because it is at the core of cost-based pricing strategy. Marketing is not free. Budgets are planned and allocated, and marketers are expected to generate enough revenue to exceed expenses, thereby producing a return on investment (ROI) for those marketing expenditures. As a student of marketing, this section should highlight to you the importance of understanding all functional areas within the organization—in this case, it’s your internal customers in finance and accounting.
⦁ During the budgeting process, marketers consider fixed costs (FC), variable costs (VC), and the sum of both—total costs. Recall that fixed costs are not affected by changes in quantity produced. Examples include insurance, property and equipment leases, and so forth. Variable costs change in proportion to the quantity produced. Examples include raw materials, utilities, transportation, and so forth.
⦁ When we chart costs versus sales revenue measured by the number of units, we are able to see where the revenue from sales will exceed the costs of production. This is the BEP, before which the company is incurring a loss on every unit produced and after which the company is earning a profit on each unit produced. The BEP concept is illustrated below in Figure 10.5.
⦁ Figure 10.5: Break-Even Chart for Determining Target Return Price and Break-Even Volume
The formula for BEP is the following.
break-even point = fixed cost / (price – variable cost)
– or –
BEP = FC / (P-VC)
Using the example from Figure 10.5 above, if we have fixed costs of $300,000 and are charging $20 for a product that costs us $10 to produce, the BEP is 30,000 units. To ensure that you understand BEP, test yourself by inserting different numbers for price and costs to calculate another BEP. For your Course Project, you are asked to calculate the BEP for your company’s product. Feel free to share the BEP of your Course Project company’s product in this week’s Discussion.
⦁ Pricing Strategy
In addition to the major strategies we’ve covered so far, there are many other pricing strategies that tend to be more tactical in nature rather than as strategic as, for example, value-based pricing. These generic strategies are listed and described in the table below.
Pricing Category Pricing Strategy Description
New Product Pricing Market Skimming Pricing Setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales Market Penetration
Pricing Setting a low price in order to attract a large number of buyers and a large market share Product Mix Pricing Product Line Pricing Setting the price of products in a product line based on cost differences between the products, customers’ perceived value of different features, and prices of similar products in competitors’ product lines Optional Product Pricing The pricing of optional or accessory products along with the main product Captive Product Pricing Setting a price for products that must be used along with the main product
By-Product Pricing Setting a price for by-products to help offset the costs of disposing of them and help make the main product’s price more competitive Product Bundle Pricing Combining several products and offering the bundle at a reduced price
Price Adjustments
Discount A straight reduction in price on purchases during a stated period of time or of larger quantities
Allowance Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way Psychological Pricing Pricing considers the psychology of prices and not simply the economics;
the price is used to say something about the product Promotional Pricing Temporarily pricing products below the normal price or even below cost as a loss leader in order to increase short-term sales Geographical Pricing FOB Origin Pricing Pricing is based on where goods are shipped from and to,
with shipping being paid by the producer up to a prespecified location, such as a freight terminal, distribution warehouse, or even the loading dock at the customer’s location Zone Pricing Pricing is based on geographic zones with nearby zones at lower prices and distant zones at higher prices to absorb distribution costs
Basing Point Pricing Pricing in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer, whether or not the products are actually shipping from that location Freight Absorption Pricing Pricing in which the seller absorbs freight charges in order to get the desired business often stated as “free shipping”
Two final pricing approaches that are not strategies, per se, are dynamic pricing and international pricing.
⦁ Dynamic pricing involves adjusting prices continually to meet the characteristics and needs of individual customers and situations.
⦁ International pricing requires the company to adjust prices to meet different conditions and expectations in different world markets.
