PRICING AND COSTING

BY MARIA , CHRIST IAN AND HARSH

FLOW OF PRESENTATION

1. Current Pricing Strategy

2. Different Costs

3. Calculations

4. Cost Based Pricing Solution

5. Other Pricing Strategies

6. 1 million Rands

7. Questions

CURRENT PRODUCT & PRICES

• Key Rings – R 25

• Midi Poppies – R 60

• Maxi Poppies - R 115

WHAT IS THE CURRENT PRICING MODEL?

• Cost Based Pricing

• Example Midi dolls – R 60 (wholesale price) you bought them for 90

• How this price is decided

• R 9 for material + R 25.5 labour + 30% Overhead + 33 % Mark Up = R 60

• So the cost pricing is dependent on three components – fixed costs (overheads) + Variable Cost (material + Labour) + Mark up (profit)

• According to this model Shwe-Shwe should be profitable ?

VARIABLE COSTS

• Materials

• Labor Charges

• Easy to Calculate?

• Increase in material costs

• Inflation

• So do we account for inflation every year and keep changing the price?

FIXED COST

• Very important to cover all the fixed costs example water, electricity, own salary, insurance, telephone, etc.

• Division of Fixed cost = X Rands

• Say production = 500 Midis

FIXED COSTS

• Therefore Overhead per Midi = X/500 Rands (which we assume is 30% overhead cost)

• Another month production = 300 Midis

• Therefore only 60 % of the overhead will be covered ( 300 * X/500)

• So the overhead needs to be distributed among lowest production of poppies

MARK UP

• How should mark up be calculated?

• Amount of profit which Shwe-Shwe wants to invest

• Profit = Pay-back + Retention

• Therefore, Shwe-Shwe needs to decide how much money it wants to invest in the business without rocketing the selling price

WHAT ARE THE COSTS

According to the financials and information given by Wandile :

Variable costs Maxi doll Midi doll Key ring

Labor costs 36.5 25.5 11.2

Material 32.5 9 4

Total 69 34.5 15.2

WHAT ARE THE COSTS

According to the financials and information given by Wandile : 2008 2009 2010 2011

Operating expenses: 18'199 61'083 49'392 73'356

Bank Charges 2'939 3'624 3'811 5'032

Accounting Fees 0 0 3'990 16'405

Insurance 0 0 3'993 7'578

Telephone and Fax 0 0 6'253 3'348

Computer Expenses 0 0 0 0

Donations 5'000 50'000 17'500 0

General Expenses 2'731 0 13'400 38'307

Travel - Local 7'529 7'459 445 2'686

WHAT ARE THE COSTS

Our assumptions :

2010 2011 2012

Operating expenses:

49'392 73'356 Operating expenses: 101'500

Bank Charges 3'811 5'032 Bank Charges 5'000

Accounting Fees 3'990 16'405 Accounting Fees 16'000

Insurance 3'993 7'578 Insurance 7'500

Telephone and Fax 6'253 3'348 Telephone and Fax 5'000

Computer Expenses 0 0 Salary Wandile 36'000

Donations 17'500 0 Electricity + water 9'000

General Expenses 13'400 38'307 Internet 5'000

Travel - Local 445 2'686 Transports 15'000

Travel - Local 3'000

HOW TO FIND THE RIGHT PRICE

• According to Wandile : bad month 200 items sold, good month 500-800 items sold

• Calculation of the overhead : conservative approach to avoid under allocation of the costs. We choose 350 items sold per month, 4200 per year

• Revenue projections are: Key rings 2.5%, Maxi dolls 20% and Midi dolls 65%

• Formula : 101’500/4’200/(69*20%+34.5*65%+15.2*3%)=65% overhead

• Add inflation of 6% over 3 years, this is about 20% price increase at the end of the 3rd year, average during the 3 years is 9%

• Markup: 30%, includes variable salary for Wandile, profits to finance growth, money going back to stakeholders

HOW TO FIND THE RIGHT PRICE

Variable costs Maxi doll Midi doll Key ringsLabor costs 36.5 25.5 11.2Material 32.5 9 4Total 69 34.5 15.2Overhead 65% 113.85 56.93 25.083 year inflation 9% 124.10 62.05 25.08Markup 30% 161.33 80.66 35.54Old prices 115 60 25New Prices 160 80 35Price increase 39% 33% 40%

PRICING MODEL

PRICING OBJECTIVES

Pricing Objectives

SurvivalCompetitive Profit

Return on investment

Market ShareCash Flow

Status quo

Product quality

PRICING MODEL

Price objective: profits

Type of product: toy / souvenir / decoration

Target market: middle/upper class tourists, mostly women 25+ years old and corporates

PRICING BASIS

Competition

Customer

Cost

SA MARKET

PRICING BASISCompetitio

n

Customer

Cost

• Market• Demand• Willingness

to pay

EUROPEAN MARKET

WOO-MEN200R

PRICING STRATEGIES

Differential pricing: different prices to different buyers for the same product (European market)

New markets: price skimming (New markets)

Promotional pricing: special event pricing (South Africa)

1 MILLION RAND FOR 3 YEARS

• Objective: Increasing demand and capacity enhancement

• Per year approx.:• 50 000 Market & exhibition stalls• 20 000 More in accounting services• 25 000 Increasing corporate sales• 85 000 Marketing & Sales Executive• 50 000 Print media publicity• 20 000 Online Sales• 100 000 Capacity enhancement

Thank you!

Questions?