STAY EVEN ANALYSIS, PRICING, ELASTICITY

1ST SLIDE

Stay-even analysis

- Stay-even analysis tells you how many sales you need when changing price to
maintain the same profit level.
- Stay-even analysis tells you how many unit sales you can lose before a price
increase becomes unprofitable.

PRICING

- Pricing is the process of determining what a company will receive in exchange for
its product or service.

ELASTICITY

- Elasticity is an economic concept used to measure the change in the aggregate

quantity demanded of a good or service in relation to price movements of that
good or service.

2ND SLIDE

THERE ARE TWO-STEP PROCEDURE TO TELL WHETHER THE PRICES

INCREASE:

1.COMPUTE HOW MUCH QUANTITY YOU CAN AFFORD TO LOSE

How to use elasticity to forecast changes in demand

- %change Quantity = %change Price / (%change Price + margin)

%change Revenue

- %change Revenue = %change Price + %change Quantity

2.PREDICT HOW MUCH QUANTITY WILL GO DOWN

When is a proposed price increase profitable? (regarding stay-even quantity)

- If the actual quantity lost is less than the stay-even quantity, then the price
increase will be profitable.
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Here is the derivation of the stay-even quantity:

- %change Quantity = %change Price / (%change Price + margin)

EXAMPLE:

The stay even quantity for a 5% price increase for a firm with a 40% contribution margin
is 11.1%=(5%)/[(5%)+(40%)]. If you expect to lose less than 11%, then a 5% price
increase will be profitable.

4rth slide

Stay-even curve example

Discussion: How high would the price of the brand have to go before you would switch
to another brand of running shoes?

Discussion: How high would the price of all running shoes have to go before you should
switch to a different type of shoe?

Note:

that if demand is elastic, price cuts increase revenue

When demand is inelastic, price increases will increase revenue

1ST SLIDE

COST BASED PRICING

Cost-based pricing can be defined as a pricing method in which a certain percentage of

the total cost is added to the cost of the product to determine its selling price.

FORMULA:
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Cost-Based Pricing Classification & Formulas

#1 – Cost-Plus Pricing

In cost-plus pricing method, an affixed percentage, also called markup percentage, of

the total cost (as a profit) is added to the total cost to set the price. Say, for example, an
ABC organization bears the total cost of $100 per unit for producing a product.
Therefore, it adds $50 per unit to the product as’ profit. In such a case, the final price of
the organization’s product would be $150. The formula to calculate the cost-based
pricing in different types is as follows:

Price = Unit Cost + Expected Percentage of Return on Cost

3RD SLIDE

#2 – Markup Pricing

It refers to a pricing method in which the fixed amount or percentage of the cost of the
product is added to the product’s price to get the selling price of the product. For
example, if a retailer has taken a product from the wholesaler for $100, he might add up
a markup of $50 to profit.

Price = Unit Cost + Markup Price

Where,

Markup Price = Unit Cost / (1-Desired Return on Sales)

4RTH SLIDE

#3 – Break-Even Cost Pricing

In the case of Break-even Pricing, the company aims to maximize contribution towards
the fixed cost.
Price = Variable cost + Fixed Costs / Unit Sales + Desired Profit

#4 – Target Profit Pricing

In target profit pricing, prices target the specific level of profits or return it wants to earn
on an investment.

Price = (Total Cost + Desired Percentage of Return of Investment) / Total Units

Sold

5TH SLIDE

Examples of Cost-Based Pricing

A company sells goods in the market. It sets the price based on cost-based pricing. The
variable cost per unit is $200, and the fixed cost per unit is $50. Profit markup is 50% on
cost. Calculate the Selling price per unit.

Here, the selling price will be calculated based on cost-plus pricing.

This $ 375 will be the price floor.