Pricing Strategies and Break-Even Analysis

PRICING DECISIONS

WEEK 2 – PERIOD 1 – Objectives

  • Define pricing strategy.
  • Understand the importance of pricing.
  • Analyze the diverse factors affecting the price.

Starter Question

  • Why are designer handbags priced high?
  • Who and what determines their price?

Gucci Hypothetical

  • What would happen if Gucci lowered all of their prices?
  • If a $1,000.00 handbag was dropped to $100.00, would that hurt the brand?

Pricing Strategy

  • Is a model or method used to establish the best price for a product or service.

The Importance of Pricing Strategies

  • Help the business choose prices to maximize profits.
  • Help maximize the market share of the business while considering consumer and market demand.
  • Competition: Setting the right price for products or services is crucial to staying ahead of the competition.
  • A well-planned business pricing strategy takes into account competitors’ prices, enabling a business to offer its products at a competitive rate.

Market Place Activity

  • Divide the class into groups of 4 or 5.
  • Assign each group 2 factors from the internal and the external factors affecting price.
  • Each group will take 2 or 3 factors to research, explain in their own words and use PowerPoint or Canva or an A3 paper to show their work
  • After 20 min allow 2 students from each group to visit.

FACTORS INFLUENCING PRICING DECISIONS

INTERNAL FACTORS
  1. Cost
  2. Company Objectives
  3. Organisational Factors
  4. Marketing Mix
  5. Product Differentiation
EXTERNAL FACTORS
  1. Competition
  2. Demand
  3. Suppliers
  4. Economic conditions
  5. Consumers
  6. Government

Internal Factors

  • Internal factors are factors that can be determined and controlled by the business.
1-Cost
  • It is the major factor that affects price
  • Firms spend money making their products. These are called costs.
  • Variable costs = Change depending on output
  • Fixed costs = remain the same no matter how much is produced
2-Company objectives:
  • Some organizations set a cost plus pricing. In such case, a percentage is added to the cost of production in order to arrive at the price.
  • The argue here is that, the company's objective is profit maximization and therefore a pricing decision must be that will consider that profit maximization objective.
  • When pricing decisions are made, they must be in line with the overall company objectives, as this is what will inform what the pricing objective really is, so that the pricing decisions made will not be against the company objective.
3-Organizational structure:
  • Pricing decisions occur on two levels in the organization. Overall price strategy is dealt with by top executives. They determine the basic ranges that the product falls into in terms of market segments.
  • The actual mechanics of pricing are dealt with at lower levels in the firm and focus on individual product strategies. Usually, some combination of production and marketing specialists are involved in choosing the price.
4- The marketing mix:
  • Price is the important element in marketing mix.
  • A shift in any one of the elements has an immediate effect on the other three - Production, Promotion and Distribution.
  • The effort for implementing strategies will not succeed unless the price change is combined with a total marketing strategy that supports it.
5-Product differentiation
  • The price of the product also depends upon the characteristics of the product.
  • In order to attract the customers, different characteristics are added to the product, such as quality, size, colour, attractive package, alternative uses etc.
  • Generally, customers pay more prices for the product which is of the new style, fashion, better package etc.

External factors

  • External factors are factors that the business cannot control.
1- Competition:
  • Market competition is a very significant factor and it affects the price strategy.
  • A firm may set high or low prices depending upon the competitor’s prices and product quality.
  • If the company’s products are better than competitors, then the price would be higher. Otherwise, the business would set lower prices.
2-Demand:
  • The demand for the company’s product in the market also plays a huge role because it tells us about the competitors, size of the market, and customers’ preferences and their ability to pay the price.
  • Sometimes, a company charges different prices to customers in different markets. The purpose is to check the results that how the market is behaving at different pricing strategies.
  • If the demand for the company’s certain product is higher, then the price would be higher. If the demand is lower, then the company would lower its prices than competitors to compete in the market.
3-Company’s suppliers:
  • Suppliers provide the raw material to the company from which the business manufactures the final product.
  • If the suppliers raise the prices, then the company has no choice but to increase the prices and pass it on to the customers.
4- The Economy of the Country
  • If the economy of the country is thriving where people are employed and earning high salaries, then raising prices wouldn’t be a problem. In such an environment, customers are willing to pay more.
  • However, when the economy of a country is in a recession, where people have limited sources of income. Businesses and companies have to set low prices to meet the customers’ ability to pay.
5-Customers/ consumers
  • It’s very important to consider the nature and behavior of the target market. Some customers are price conscious and the others are quality conscious.
  • Therefore, the business should know the nature of its target market.
6-Local Government
  • Sometimes the government controls the prices of certain products by introducing some laws.
  • The purpose is to control inflation so that the prices shouldn’t go higher at a certain point.
  • Therefore, the company has to consider the local laws of the government as well

Plenary

  • List one thing you understood from the lesson and one question you still have. Send answers on teams or write them on a sticky note.

WEEK 1 – PERIOD 2 –Objectives

  • Differentiate between demand and supply
  • Analyze the laws of supply and demand
  • Predict how changes in price affect demand and supply

Starter - Demand vs Supply

  • Explain the difference between demand and supply?

Demand and supply

  • Demand: how much of a product consumers are both willing and able to buy at each possible price during a given period.
  • Supply: refers to the willingness and ability of producers to offer goods and services for sale.

Laws of Supply and Demand

  • The law of demand says that at higher prices, buyers will demand less of an economic good.
  • The law of supply says that at higher prices, sellers will supply more of an economic good.
  • These two laws interact to determine the actual market prices and volume of goods that are traded on a market.

Video Activity

  • Divide the class into groups of 3; each group will watch the video, discuss, and answer the questions related on the worksheet.
  • As a team, they will design and sell a used vintage car after pricing it.
  • 10 min for designing.
  • After 20 minutes, allow groups to exchange their papers to share and discuss their answers and how they designed and priced their cars.

Early Finishers

  • Research and compare the pricing strategy of a real-world UAE-based car company like Al-Futtaim Motors to the price of your car.

Equilibrium Point

  • Equilibrium is where supply meets demand.

  • Surplus: when supply exceeds demand.

  • Shortage: when demand exceeds supply.

How does pricing affect supply and demand?

  • Sometimes the business sets the price too high or too low
  • If the price is too low, it creates a shortage as the product sells out quickly and sellers could have raised the price and made more money. Meaning that demand is more than supply.
  • If the price is too high, it creates a surplus as the product doesn’t sell very well and too much product stays on the shelves, not making money for the seller, meaning that demand is less than supply.

Shortages and Surpluses

  • Shortages (supply is less than demand) drive prices to go up to reduce the demand
  • Surpluses (supply is higher than demand) drive prices to go down to reduce the supply

Plenary

  • Complete the Blooket activity.

WEEK 1 – PERIOD 3 –Objectives

  • Define break-even point
  • Calculate and graph break-even point
  • Analyze the impact of pricing on break-even point

Starter

  • Choose the odd one out (Fixed vs. Variable Costs):
    • Advertising
    • Rent
    • Raw materials
    • Managers' salaries
    • Interest payments on loans

Costs

  • Fixed costs: insurance, taxes, rent, interest paid on loans.
  • Variable costs: wages, cost of raw materials and other inputs, advertising.
  • Total costs = Fixed costs + variable costs

Sales revenue

  • Firms get money from selling their products. This is called sales revenue
  • sales revenue(income)=selling price×number of unitssales\ revenue(income) = selling\ price \times number\ of\ units

Profit

  • A financial gain, the difference between the amount earned (sales revenue) and the amount spent in buying, operating, or producing something (total costs)
  • profit=sales revenue–total costsprofit= sales\ revenue – total \ costs

Break-Even Point

  • The point at which total cost and total revenue are equal
  • At this point, the business covers its costs without making profit
  • Example: The business is selling bats with the following information:
    • fixed costs are 40 per unit
    • selling price is 35 per unit
    • variable costs are 20 per unit
  • Calculate the break even point using the formula

Break-Even Point - Example

  • The business information:
    • fixed costs are 40 per unit
    • selling price is 35 per unit
    • variable costs are 20 per unit
  • Answer:
    • 40/(35−20)=2.667≈3 bats40 / (35-20) = 2.667 \approx 3 \ bats

Break-Even Analysis Activity

  • Divide the class into 3 differentiated groups
  • Handout the 3 level break-even analysis activity a b c
  • After 20 minutes display the answer key for students to discuss , share and correct their work.

Graphing the break-even point

Output (No of cricket bats)Fixed costsVariable costsTotal costsSales revenue
1£40206035
240408075
34060100105
44080120140

Graphing: Step 1 - Axes

  • Draw a graph with "Output (No of cricket bats)" on the x-axis and "Costs (£)" on the y-axis.

Graphing: Step 2 - Fixed Costs

  • Insert fixed costs as a horizontal line at £40.

Graphing: Step 3 - Variable Costs

  • Add in variable costs, increasing with each unit of output.

Graphing: Step 4 - Total Costs

  • Calculate total costs (Fixed + Variable) and plot them on the graph.

Graphing: Step 5 - Revenue

  • Now add revenue to your graph, increasing with each unit sold.

Graphing: Identifying the Break-Even Point

  • The break-even point is where the total cost line intersects with the sales revenue line.
  • In the example, the break-even point is at approximately 2.6 = 3 bats.

How does pricing affect the break even point?

  • Higher Prices: Charging higher prices per unit increases revenue for each sale. As a result, the break-even point decreases because fewer units need to be sold to cover fixed costs.
  • Lower Prices: Lowering prices may increase sales volume but at the cost of lower revenue per unit. This increases the break-even point, as more units must be sold to cover fixed costs.

Plenary

  • List 1 thing you understood from the lesson and 1 question you still have.
  • Send answers on teams or on Linoit.

WEEK 2 - PERIOD 4 -Objectives

  • Review break-even point
  • Analyze factors affecting pricing, market shortages and surpluses.

Starter

  • Complete the Quizizz activity.

TIME FOR REVIEW

  • Section review in pairs
  • Bonus for the first pair that finishes correctly
  • Multiple choice questions:
    • Surplus is a condition of:
      • A excess supply
      • B a deficiency in supply
      • C equilibrium
      • D excess demand
    • says that at higher prices, buyers will demand less of an economic good
      • A law of demand

Extra task

  • Research for UAE-based companies
  • Choose Two Companies: Select two UAE companies from different industries (e.g., retail, tech, hospitality).
  • Gather Data: For both companies, find data for a specific period
    • Fixed Costs: Rent, salaries, utilities, etc.
    • Variable Costs: Costs that vary with sales (e.g., raw materials, production).
    • Selling Price: Price per product/service.
    • Sales Volume: Average sales over a period.
  • Calculate the Break-even Point:
  • Compare the Companies:
    • Which company has a lower break-even point?
    • How do their business models differ (e.g., higher fixed or variable costs)?
  • Suggest ways each company can improve financial performance based on their break-even point.

Plenary

  • How do you rate this lesson, on a sticky note draw:
    • 3 stars for easy
    • 2 for medium
    • 1 for hard