Pricing For Profit

1
Pricing For Profit

• CWCF Conference 2006
• By
• Peter Hough, MBA

2
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.

3
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.

4
Setting Prices

• Value
• Does your product have unique features
• Position (niche or mass market)
• Competition
• Similar products
• Alternative products
• Price strategy
• Market Share

5
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?

6
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?

7
Financial Concepts

• Revenue
• Fixed Expenses
• Variable Expense
• Cost of Goods Sold
• Mark-up
• Gross Margin
• Profit

8
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

9
Fixed Expenses

• Expense for a particular period (say 1 year)
  which are incurred no matter what is the co-ops
  level of sales.

10
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.

11
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

12
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 200
• COGS 160
• Gross Margin 40 40
• Gross Margin 40 / 200 x 100 20

13
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
14
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.

15
Breakeven

• Number of units required to breakeven
• Fixed Costs Number of Units
• Unit Price COGS/Units
• 10,000 10,000 200 Units
• 100 - 50 50
• What is the mark-up?
• What is the Gross Margin?

16
Breakeven

• In dollars of revenue
• Fixed Cost Dollar Sales
• Gross Margin
• 10,000 10,000 20,000
• (100 - 50) .5
• 100

17
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

18
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