pricing for profit cwcf conference 2006 by peter hough, mba
TRANSCRIPT
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Pricing For Profit
CWCF Conference 2006
By
Peter Hough, MBA
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Objective
• To gain an understanding of the basics of pricing in order to determine at what level of sales at a particular price, will enough revenue be produced to generate the wages and profits which the co-op requires.
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Why is pricing important
• Price is often a key determinant of market acceptance of the product or service.
• Pricing is a key factor in determining the amount of revenue a co-op will generate.
• Since revenue is required to pay expenses and to produce profit, pricing is crucial.
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Setting Prices
• Value– Does your product have unique features– Position (niche or mass market)
• Competition – Similar products– Alternative products– Price strategy– Market Share
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Setting Prices
• Price sensitivity– Is it an essential or discretionary purchase
• Size of the market and diversity of market– How much market share do have or need?
• At what stage of business development is your co-op?
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The Fundamental Question
• At this particular price will enough customers purchase this particular good or service to cover your costs and produce the required profit?
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Financial Concepts
• Revenue
• Fixed Expenses
• Variable Expense
• Cost of Goods Sold
• Mark-up
• Gross Margin
• Profit
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Revenue
• Revenue is generated from the sale of goods and services– Revenue is determined by the number of units
sold and the price per unit
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Fixed Expenses
• Expense for a particular period (say 1 year) which are incurred no matter what is the co-op’s level of sales.
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Cost of Goods Sold (COGS)
• COGS is the amount the co-op must spend to purchase and/or produce the products or services so that they are ready to sell.
• For a retailer this would include cost of the goods plus freight.
• For the manufacturer it would include the cost of raw materials with freight and all production inputs such as labour that are required to produce the item ready for sale.
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Mark-up
• The mark-up is the percentage of the cost of an item which is added to the cost to determine the selling price.
• COGS - $1.00
• Mark-up 50% = $1.50
• Mark-up 10% =
• Mark-up 100% =
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Gross Margin
• The gross margin is the difference between the revenue generated from the sales of goods and services and the COGS
• It can be expressed in dollars or as a percentage of revenue.Revenue $200COGS $160$ Gross Margin $ 40 40% Gross Margin $40 / 200 x 100 = 20%
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Mark-up Versus Gross Margin
• It is important to note these are very different concepts.
% Mark-up = % Gross Margin
10% 9.1%
25% 20%
50% 33%
100% 50%
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Profit
• Profit is the difference between revenue generated and the total expenses incurred for a particular period.
• The benefit a member of a worker co-op gains includes both wages and a share in profits. Since wages are an expense, increasing or decreasing members’ wages will decrease or increase profits respectively.
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Breakeven
• Number of units required to breakeven
• Fixed Costs = Number of UnitsUnit Price – COGS/Units
$10,000 = 10,000 = 200 Units$100 - $50 50What is the mark-up?What is the Gross Margin?
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Breakeven
• In dollars of revenue
• Fixed Cost = Dollar SalesGross Margin
$10,000 = 10,000 = $20,000($100 - $50) .5
$100
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Breakeven Plus Target Profit (PT)
• Number of units required
• Fixed Costs + PT = Number of Units
Unit Price – COGS/Units
$10,000 + $5,000 = 15,000 = 300 Units
$100 - $50 50
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Breakeven Plus Target Profit (PT)
• In dollars of revenue
• Fixed Cost + PT = Dollar Sales
Gross Margin
$10,000 + $5000 = 15,000 = $30,000
($100 - $50) .5
$100