BUSN 491 Pricing Strategy - Achiever Papers

Conduct a comparison of different pricing practices. Complete a chart with a Pricing Strategy for your product/service along with an estimated “Break Even” post

Pricing Strategy

Regent University

Pricing Strategy

The three options I evaluated for a pricing strategy are cost based, restaurant industry pricing, and competition based. It will cost $0.41 to produce each ice cream cone ($0.30 for the ingredients + $0.06 for the flavor burst syrup + $0.05 for the cone). So, my Cost of Goods Sold per Unit is $0.41. My fixed monthly costs are $2,522 ($1,600 for rent + $200 for utilities + $722 for my loan payment).

Cost Based Strategy

I know the cost of producing each unit ($0.41), so I analyzed this strategy with a goal to charge a 200% markup. That is a normal markup in the retail industry, and if I used this strategy my price would be $1.23 per cone. This gives me a Gross Profit per Unit of $0.82.

Breakeven Units – 2,522 / 0.82 = 3,075

At this price, I must sell nearly 3,100 units per month just to cover my operating expenses, and that does not include paying employee’s salaries. This method does not account for my competition’s price, or my customer’s needs and willingness to pay.

Restaurant Industry Pricing

In the food service industry, there is a traditional breakdown many places use for their pricing. 33% covers the Cost of Goods Sold + 33% for labor and overhead expenses + 33% for Gross Profit. Using this, my price would not change from the Cost Based Strategy. My Cost of Goods Sold remains $0.41 regardless of my strategy. So $0.41 (COGS) + $0.41 (Labor/OH) + $0.41 (Gross Profit) = $1.23 per unit.

Breakeven Units – 2,522 / 0.41 = 6,151

Even though the price of my individual unit of sale does not change, I must sell double the number of units to reach my breakeven point each month. The only difference here is that 33% has already been accounted to pay expenses, and the remaining 33% is actually Gross Profit. That explains why I would need to sell double the units, but this breakdown is simple to use, and that is why many restaurants do it. This method does account for the price of my competition, nor my customer’s needs or willingness to pay.

Competition Based Pricing

This is a reactive method of pricing, and it is based off of what my competitors charge. If they have a better product, I price below them. If they have a sub-par product, I price above them. If we are equal but I want to lure them away, I charge a slightly lower price. This is the method I have chosen to use for my forecast. I compiled the data for me two major local competitors. Coldstone Creamery is a high end ice cream shop; they average $5.33 for an ice cream cone, and $5.38 for a shake. Dairy Queen is a cheaper/faster ice cream shop offering a full menu; they average $2.60 for an ice cream cone and $3.93 for a shake. They are both international franchises that have established control over their market segment.

The way an item is priced says a lot to consumers, and is the reason for many business failures. I am trying to sell a premium soft serve ice cream, and I can offer an astonishing 300 flavors from each machine. This gives me something new to offer, and there is not one ice cream shop in Virginia Beach doing this. I consider the product to be inferior to Coldstone, but not much. I consider the product to be superior to Dairy Queen, but I don’t offer a full menu. So, I chose to split the difference, and charge a price right in between both of them. I averaged the prices they charge for various sizes to get my numbers for each franchise, and split the difference to arrive at my price. Under this pricing strategy I would charge $3.95 for an ice cream cone, and $4.65 for a shake. I will only sell 1 size cone and shake, but it will be more in quantity than a medium from either store, and more flavor options than anyone else.

Gross Profit Per Cone = 3.95- 0.41 = 3.54 & Breakeven Units = 2522 / 3.54 = 712

Gross Profit Per Shake = 4.65 – 0.41 = 4.24 & Breakeven Units = 2522 / 4.24 = 595

Using this method, I only need to sell a little more than 1/4 of units I would need to sell using the cost based method, and 1/8 of the units from the restaurant method to meet my breakeven point each month. If I only sold shakes, it would be even less, and any combination of the two is still a much smaller volume of sales. Considering I am trying to sell a high quality soft serve ice cream, I believe that this pricing strategy allows me to reach my goals much faster. I have priced myself equally between two powerful competitors; I am offering a quality close to Coldstone with the speed of Dairy Queen, and a variety neither of them have nor anyone else here. A massive 300 flavor options, with an unbelievable number of combinations, and it’s all possible from 1 machine.

I chose to use the competition based pricing because there are many competitors here, and I evaluated the most successful ones. Cost based pricing did not consider any other factors, and the price set my sales goals too high for a new venture. Restaurant based pricing techniques were very simple, but I needed to sell double the amount to meet the same goals. The competition based pricing factored in my competitors, and their experience in this industry for decades. I did not consider my customers because I am combining two segments of the eating out ice cream market, and I want to reach both with a new product. High quality soft serve ice cream is not commonly sold, and the variety I offer only comes from top of the line machinery. By splitting the difference between the high and low end ice cream shops, I can reach the majority and offer the something new. It has not been done in Virginia Beach yet.

I will submit my entire business plan from Liveplan because I cannot separate the tables from the document. They show that the business can be completely profitable by the end of the first year. Using the competition based pricing plan, if I meet the sales requirements monthly, the business will be able to pay off the loan far in advance of the 3-year deadline. Also, it allows me to maximize my profit potential much sooner, and with many less units being sold than the other pricing methods. You will find tables, charts, and forecasts for all the needed information in that document. Please look at the expectations section for the financial highlights by year, and the financial plan section will hold the rest of the tables and charts needed for this assignment. I could not separate them from the assignment. I have also attached the references that I used to gather my information for making my calculations.

References

http://www.loopnet.com/for-lease/retail/2/?bb=8hx6im5lpHh_8_-uL

http://www.point2homes.com/US/Neighborhood/VA/Virginia-Beach/Ocean-Lakes-Demographics.html

http://simonhouses.com/neighborhoods/virginia/virginia%20beach/red-mill-farm-homes

https://upserve.com/blog/3-ice-cream-marketing-strategies-for-tourist-season/

https://www.vdh.virginia.gov/lhd/rappahan/foodsvcs/

https://www.vbgov.com/government/departments/commissioner-of-the-revenue/business-license/Pages/business-license-tax-calculator.aspx

Running head: PRICING STRATEGY 1

PRICING STRATEGY 6

Pricing Strategy

Regent University

Introduction

According to Safety Research and Strategies (2007), the used tire business is booming. “The industry generates high profit margins for retailers and wholesalers” (Anonymous, 2007). Tire recyclers receive a fee of $1.00 to process a tire, but may cull a tire with legal tread that then undergoes an inspection process and return it to market with a price between $1 and $10. “According to the Rubber Manufacturers Association, a tire industry trade group, an estimated 30 million used tires are sold to motorists each year. That represents nearly 10 percent of the 318 million new tires sold in the U.S. annually” (Anonymous, 2007). Safety Research and Strategies (2007), further report one tire company processed 17 million tires and of those, 6 million were returned to the market. Those 6 million tires generated revenue of $6 – 60 million for the tire processor. Gleaned from this is that the used tire market is at least 6 million tires annually. Other tire processors engage in this market practice, which substantially increases the size of the used tire market.

Pricing Strategy

A 13″ tire will be sold for $35.20, following a proven business model. A local competitor sells similar sized tires for $35 – 45, depending on grade (quality) of tire. The cost of a 13″ tire is $13.00 and will sell for $32.00. The cost of disposal is $1.25. The price to the customer for tire disposal is $3.20. A competitor charges $5 per tire to dispose of the take-offs (Prices). Total cost for a 13″ tire is $14.25, which will sell for $35.20. This is $0.20 higher than one competitor. This pricing generates a dollar mark-up (gross profit) of $20.95. This pricing structure is competitive due to product elasticity, and yet yields a 147% mark up on cost of goods and a 40% mark-up percentage on the selling price.

The markup percentage on cost = dollar markup (20.95) divided by cost (14.25) = 147%. The markup percentage on selling price = dollar markup (20.95) divided by selling price (35.20) = 60%.

% of Selling Price

Break Even Analysis

Tire sales are forecast on the cost and price of 13″ tires at 30 tires per day based on a 24 day month. With sunk costs of $15,040 and a mark-up of $20.95, 718 units will need to be sold to recuperate sunk costs. At an average sale of 30 tires per day, it will take 24 days to recuperate sunk costs. 24 days is the average days the business is expected to be open each month.

Additional auto services, such as tire repairs and brake replacement service, will generate $9,100 per month. Combined with expected tire sales of $25,344 per month, a monthly revenue of $34,444 will be realized. Total monthly expenses are forecast at $17,855. This provides a monthly gross profit of $16,589 and an annual gross profit of 199,068. Subtracting the sunk costs, first year profit is expected to be $184,028. (see next page)

Monthly Expenses

Additional Services Revenue

Additional services will generate approximately $9,100 in sales at an additional cost of only $195. One month of additional service sales will cover the entire month’s labor ($4600) and operating costs ($2800) leaving $1700. $1700 – $195 (cost of additional services) generates $1505 as gross profit for the month. This does not include revenue from used tire sales, which generate 74% of monthly income. Additional services generate 26% of monthly income.

Income from additional services ($9100) will pay the overhead costs ($7400).

Cash Flow

Used tire sales will generate $25,334 minimum per month. This figure was based on the number of expected tires sales, calculated at the 13” tire size rate. Greater income will be realized from sales of the larger tire sizes.

Ramp Up

Business will start with most of the equipment calculated in sunk costs. The biggest expense is the low profile tire machine with a cost of $15,000. Five air impact wrenches are not needed at start up, saving $450. During ramp up operations, the business will not have employees and will add them when sales permit. Potential employees will be interviewed prior to and during ramp up operations. Sales during ramp up operations may not support the lease and will come out of personal investment until payment can be shifted to the business. This type of business allows for easy ramp up due to its simplicity and low investment requirements. New employees can be trained within a few hours and become proficient within a few days. Due to inventory storage needs, a large gas station or small warehouse facility is needed. Starting small and then moving within a few months could potentially harm the business. This necessitates the building is omitted from scaling during ramp up considerations. Ramp up to full scale operations is estimated to be 3 months.

Resources

Anonymous (2007). Used Tires: A Booming Business with Hidden Dangers. Retrieved from http://www.safetyresearch.net/Library/Used_Tires.htm

Prices.
UsedTireExpress.com. Retrieved from http://usedtireexpress.com/prices/2489267

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Evaluating Pricing Strategies

The requirement for the assignment was to develop a chart with a Pricing Strategy and an estimated “

Break Even

” post (charted). This was due to be posted by midnight.

Members of the BUSN 491 class: I know that you have been working hard on your Business Plans and financial statements. Some of you also doing presentations today. There is one item that we need to clean up; and that is your pricing strategy document. That was still an individualized item, and so I will give an individual score. Unlike some of the credit for entrepreneurship interviews, I do need to grade this document. It’s worth 10% of your grade.

I have gone through and looked at what I had requested and what was included in the document. Because of the resources available to you with the tools online that were given to you for this assignment, I did expect as part of this assignment that you would give some consideration of the different pricing options. I believe we discussed this in class. Certainly the types and mix of products and services that you’re offering would be considered; as well as comparative products from other competitors, your cost of doing business and the consideration of the other influences, and how all these things are affecting your pricing. You also were asked to consider a breakeven point for your products. With the break-even plan you should be looking at your overall product offerings. Also if the information was incomplete, or the paper was late, then points would be deducted.

So what I’m going to do after this note is to send you a checklist with these items and what I saw on your pricing strategy. I believe the assignment called for a pricing strategy in Unit 5. But I’d like you to reflect back and consider if I missed something in the review of the document. Perhaps you did provide the items that I requested. So I’ll give you a couple days to review my checklist and your pricing strategy, and then by Thursday I want to be able to submit a final grade on this.

I looked at some of the information posted on the Blackboard site for this course on pricing, specifically these web link which were available to you:

http://www.smallbusinessnotes.com/marketing-your-business/pricing-a-product-or-service.html

http://www.bizfilings.com/toolkit/sbg/marketing/packaging-pricing/pricing-is-difference-between-success-failure.aspx

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