Price Setting NDFS Tree Promotion / NDCDEA Meeting – Mar. 19, 2014 © 2013 Board of Regents, South...
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Transcript of Price Setting NDFS Tree Promotion / NDCDEA Meeting – Mar. 19, 2014 © 2013 Board of Regents, South...
Price SettingNDFS Tree Promotion / NDCDEA Meeting – Mar. 19, 2014
© 2013 Board of Regents, South Dakota State University iGrow.org
© 2013 Board of Regents, South Dakota State University, iGrow.org
Price setting can be complicated.Seems to be guesswork.
Today, try to simplify
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Objectives• Cover Costs/Generate Profit• Market Positioning• Market Share• New Product• Branding
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Objectives• Cover Costs/Generate Profit• Market Positioning• Market Share• New Product• Branding
© 2013 Board of Regents, South Dakota State University, iGrow.org
Main Pricing Strategy• Cost-plus PricingCost/unit + Profit/unit = Price/unitProfit
1. Return on good decisions2. Use to expand, invest3. Financial cushion
© 2013 Board of Regents, South Dakota State University, iGrow.org
What is Profit?
Revenue/unit TR - Cost/unit or
- TC Profit /unitProfit
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Profit Margin in grocery stores is typically about 1 to 2 percent of sales(volume business)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Profit Margin in restaurants is typically about 5-6 percent (Forbes, 2011)
Profit Margin in greenhouses, nurseries, is 5-10 percent
Costs of Selling Product(Cost of Production)
• Costs are broken up into two areas –
variable, operating, or direct costsand fixed, ownership, or indirect costs.
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© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product1. Fixed Costs
- Do not change directly with production/sales
2. Variable Costs- Do change directly with production/sales
Costs of Selling Product• Cost of Production varies
depending on how much produced
• As production increases, cost per unit goes down (to a point)
• Fixed costs are spread over more units• Assuming variable costs per unit are constant
12
© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product1. Fixed Costs2. Materials/Supplies3. Labor4. Marketing (transportation, packaging,
advertising)
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Costs of Selling Product1. Fixed Costs
These are property and building costs, equipment costs, insurance, utilities, property taxes, office expenses, and interest
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Costs of Selling Product Fixed Costs – Segment
If selling trees is 25% of your “business” – estimate 25% of these costs and divide by # of plants
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Costs of Selling Product2. Materials/Supplies
This is your tree cost and any associated costs on a per tree basis (variable costs) (COGS)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product Materials/Supplies
Or, cost of seedling, fert., soil, container, etc.
© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product3. Labor
Labor can be a variable cost if time per unit can be determined (5
workers x 10 hours x $12.00/hr for 1,000 trees = $0.60 per tree)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product Labor
Labor can be handled as a fixed cost if workers are paid a salary
© 2013 Board of Regents, South Dakota State University, iGrow.org
Relative importance of employer costs for employee compensation, June 2013Compensation Civilian Private State and local component workers industry government___________________________________________________________________Wages and salaries 69.2% 70.3% 64.5%Benefits 30.8 29.7 35.5 Paid leave 7.0 6.9 7.4 Supplemental pay 2.4 2.8 0.8 Insurance 9.0 8.2 12.2 Health benefits 8.5 7.7 11.8 Retirement and savings 4.7 3.7 9.0 Defined benefit 2.9 1.6 8.3 Defined contribution 1.8 2.1 0.8 Legally required 7.8 8.2 6.1
© 2013 Board of Regents, South Dakota State University, iGrow.org
Costs of Selling Product4. Marketing (fixed or variable cost)
- estimate cost per tree
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Costs of Owning Machinery1. Fixed Costs2. Repairs and Maintenance3. Labor4. Fuel
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Costs of Owning Machinery1. Fixed Costs
These are housing costs, depreciation, insurance, interest, and property taxes
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Costs of Leasing Machinery1. Lease Costs2. Labor3. Fuel
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Must at least cover VC!Grass seed is product - Fixed Cost is a Forklift
Volume Price/Unit ($)
VC/unit($)
FC/unit($)
TC/unit($)
Profit/Unit ($)
2,000 3.50 1.00 1.00 2.00 1.50
2,000 4.50 3.50 1.00 4.50 0
2,000 3.50 3.50 1.00 4.50 -1.00
2,000 2.50 3.50 1.00 4.50 -2.00
© 2013 Board of Regents, South Dakota State University, iGrow.org
Breakeven Volume• Number units at which Revenue equals
Total Cost• Minimum sale volume• Fixed costs of $5,000/month• Variable costs of $20/tree• Price set at $50/tree
Breakeven volume is 167 trees per month
© 2013 Board of Regents, South Dakota State University, iGrow.org
Breakeven Volume $
Trees
5kFC
100
Revenue
167
VC
TC
8,350
© 2013 Board of Regents, South Dakota State University, iGrow.org
Breakeven Price• Price at which Revenue equals Total Cost
• Minimum sale price• Everything constant except tree price• Fixed costs of $2,000/month• Variable costs of $20/tree• On average, sell 200 trees/month
Breakeven price per tree is $30$2,000 + $20(200) = x(200)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Penetration pricing
- very low margin, or at cost, or below total cost
- low price generally means large salesBenefit – get established, sell productDownside - later raising prices causes
backlash
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Penetration pricing
- works well when demand is elasticP
Q
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
Demand
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Penetration pricing
- works well with high (large) fixed costs
- fixed costs spread over large number of
sales (production)
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
© 2013 Board of Regents, South Dakota State University, iGrow.org
Selling grass seedAssume FC = $10,000
Volume Price/Unit ($)
VC/unit($)
FC/unit($)
TC/unit($)
Profit/Unit ($)
500 2.25 1.00 20 21 -
1,000 2.25 1.00 10 11 -
5,000 2.25 1.00 2 3 -
10,000 2.25 1.00 1 2 0.25
20,000 2.25 1.00 0.50 1.50 0.75
50,000 2.25 1.00 0.20 1.20 1.05
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Premium PricingSetting price relatively high
- works well whendemand is inelastic- works well whenno good substitutes
P
Q
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
Demand
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Premium pricing
very large margin,but don’t sell many units,or, don’t have to sell many units
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Premium pricing
- new product- product without substitutes- segmented market (high end users)
- few buyers, so that dictates high price
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Pricing Strategies• Bundling
Bundling something desired, but expensive, with something less desirable, but profitable
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Pricing Strategies• Bundling
You buy a tree for $50, sell for $60 (profit of
$10), or offer to plant same tree for $80 (your planting cost is
$10, profit of $20)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Bundling
You buy a tree for $55, sell for $60 (profit of
$5), or have expenses, seedling, fert., container, soil, labor, fixed
costs, at $50, sell for $60 (profit of $10)
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing Strategies• Value AddedAdding value such that additional revenue is greater than additional cost
You buy a seedling for $5 and sell for $10, or you buy seedling for $5, add $45 worth of stuff, and sell for $70Added cost = $45Added value = $65
© 2013 Board of Regents, South Dakota State University, iGrow.org
Pricing based on QualityConsumers evaluate on price and quality.Perceived quality (quality is subjective).Higher price may signal more value.More perceived value can garner higher price.
Value = Quality/Price
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
© 2013 Board of Regents, South Dakota State University, iGrow.org
Value PricingDifferentiated Product
Product Price/unit Quality Value
1 10 8 0.8
2 12 9 0.75
3 15 15 1
4 20 23 1.15
Commodity
Product Price/unit Quality Value
1 10 20 2
2 12 20 1.6
3 15 20 1.3
4 20 20 1
Source: Setting Your Price, Ag Decision Maker, File C5-17, Iowa State University Extension
Economies of Scale• As scale increases, cost per unit
decreases• Renting a warehouse, thinking
about doubling the size• Revenue will double• Variable costs will double• Fixed costs increase, but if any do not double
Economies of Scale – Cost/unit
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Economies of Scale• Volume discounts are essentially
the passing along of savings from economies of scale (and specialization)
43
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Competitor’s PricesKnow what these are, if any.Can you undercut?Should you undercut?
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Prices ending in 9“Was $40, now only $29”“Was $40, now only $25”
Advertising Ideas
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Weber’s LawPrice increases of around 10% upper limit of acceptability
- consumer don’t notice or don’t care
Advertising Ideas
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AnchoringPlacing premium products and services close to standard items
- less expensive items may seem like a
bargain
Advertising Ideas
© 2013 Board of Regents, South Dakota State University, iGrow.org
Price Similar Products Differently
Avoids “action paralysis”- consumer defer decision
Advertising Ideas
© 2013 Board of Regents, South Dakota State University, iGrow.org
A lot of research done in advertising on context
“Experience” product or service provides
Advertising Ideas
© 2013 Board of Regents, South Dakota State University, iGrow.org
Kim Douglas DillivanCrops Business Mgmt Field [email protected]