Thinking about pricing and costs

Managing Price
Marketers want demand-led pricing

Accountants want cost-led pricing

 Environmental
The Marketing Marketing Mix
Analysis,
Process Product
Understanding the
Price
Customer
Place
Promotion

People
Processes
Segmenting, Physical
Targeting, evidence
Positioning

For each
segment
 Managing Price - Intro
• Price is a key tool for both marketers and
accountants; it is the only one of the 4Ps
that can be changed quickly!

• It is also the only thing that brings revenue

 What’s the best way for you to
price your event?

• What research will you do to help you answer this?

• What information will you need to help you answer
this?
 Managing Price - Concepts
Do we all want to pay as little as possible?

Company to customer:
“We’ve got low cost or good quality, which
do you want?”
 Value for money
• What is the value that you are offering your
customers?
Because it’s worth it...

Or in marketing language…

Value
Because it’s worth it...

It’s all about the

VALUE
VALUE

Does NOT mean

- Cheap
 Managing Price

VFM:
• the feeling that what the customer gave away was well
worth the exchange

• Quality and satisfaction (or lack of these) are

remembered long after the pain of the price is forgotten

• What value do you want to provide your customers?

 Thinking about costs
You are lucky enough to own a car (and can afford the
insurance).
You and two friends want to go to Brighton for the day, but
you are hard up.

The cheapest return train fares are

£30 each.

The AA quotes a figure of about £0.50 per mile to run a

small car.

Brighton is 120 miles from Bedford

Train or car?
Bedfordshire Business
School
 Train or Car?

Three return fares = £90

240 miles @ £0.50 = £120

But.......
Does it really cost £120 to use the car?

Bedfordshire Business School

 Some Cost Concepts
• Opportunity (or cost foregone)
• Historic (sometimes called “past”)
• Direct as distinct from indirect
• Prime as distinct from overhead
• Marginal as distinct from total absorption
• Variable as distinct from Fixed
(examples?)
Business School
 Cost Consequences
You live two miles out of town. Late one
night you are tired and hungry after a long
day in the University. You find you have only
£10.00 in your pocket.
You can either have a takeaway pizza, and
walk home, or take a cab, and go without
eating.
What is the cost to you of either decision?

Bedfordshire Business School

 Decision-relevant Costs
• Decisions can only affect the future – so only costs
yet to be incurred really matter for decisions

• Past costs are usually irrelevant

• Variable costs are usually relevant, fixed costs rarely

are. But fixed costs may change as a result of a
decision.

Business School
 Development of Costing
• Costing as a discipline evolved from the needs of mass
production, with a focus on materials, labour and heavy
equipment – high direct factory costs and the use of
total absorption costing

• Traditional systems are less useful today, when

competitive advantage relies so much on knowledge-
based assets, and the balance of cost in most
organisations is more indirect, in overheads

Business School
 Typical Costing Model

OVERHEADS
Office Canteen
FACTORY - PRODUCTION
Materials Products
Machining Welding Assembly

Business School
 Elements of Manufacturing Cost
financial
t r t
r
c
e als e ct t
e
h rec selling
overhead d i ri d ir r o di
n
i at e in bou in sts administration
m la co
manufacturing

other
prime cost direct direct direct
materials labour costs

Business School
 Cost behaviour
• Variable costs vary directly in line with the
level of business activity
• Fixed costs tend not to vary with the level of
business activity
• Stepped costs: where the business reaches
the level of activity where a fixed cost must
increase, the increase is sudden
• Semi-variable costs have both fixed and
variable elements

Bedfordshire Business School

 Variable Costs
cost during the period in £

level of activity in the period

Bedfordshire Business School

 Fixed Costs
cost during the period in £

level of activity in the period

Bedfordshire Business School

 Stepped Fixed Costs
cost during the period in £

level of activity in the period

Bedfordshire Business School

 Semi-variable costs
cost during the period in £

level of activity in the period

Bedfordshire Business School

 Marginal Costing
• In economics, a marginal cost is the
cost of one additional item
• Marginal costing describes an approach
to costing that focuses on variable costs
• Contribution refers to the amount that is
left over after deducting variable costs
from sales – and is the contribution to
fixed costs

Bedfordshire Business School

 Example – Takeaway Pizza

Sales price per pizza £7.00

Less: foodstuff used (variable) 4.00
Contribution per pizza sold 3.00

Note that these figures are per unit

Bedfordshire Business School

 Example, continued
If the total fixed costs (overhead) are £2,000
per week, and 800 pizzas are made and
sold:
Total sales (800 @ 7.00) £5,600
Total variable costs (800 @ 4.00) 3,200
Total contribution 2,400
Less: total fixed costs 2,000
Profit 400
Bedfordshire Business School
 Break-even
The break-even point is the point at which
no profit or loss is made.
If the contribution is £3.00 per unit then
how many units must be made to cover
fixed costs?
2,000/3.00 = 667 units

Bedfordshire Business School

 In total

Total sales (667 @ 7.00) £4,669

Total variable costs (667 @ 4.00) 2,669
Total contribution 2,000
Less: total fixed costs 2,000
Profit nil

Bedfordshire Business School

 Break-even Chart
Graph total costs, split into fixed and variable
7,000
6,000 st
c o
to ta l
5,000
Total Value (£)

4,000
l e co sts
3,000
variab
fixed costs
2,000
1,000
0
0 100 200 300 400 500 600 700 800 900 1000
Volume (000)

Bedfordshire Business School

 Break-even Chart
Add a line for sales revenue
8,000

7,000
nue
re ve
e s
sal
6,000
Total Value (£)

5,000

4,000

3,000

2,000

1,000

0
0 100 200 300 400 500 600 700 800 900 1000
Volume (000)
Bedfordshire Business School
 Break-even Chart
8,000

7,000 nu e
break-even r eve
s
6,000
sale
c ost
Total Value (£)

5,000 to t a l
4,000

3,000
fixed costs
2,000

1,000

0
0 100 200 300 400 500 600 700 800 900 1000
Volume (000)
Bedfordshire Business School
 Costings…
• For a hotel and restaurant, are the following fixed
costs or variable costs?
• Laundry for towels and sheets
• Salaries of Reception staff
• Salary of Night porter
• Bottles of tonic water
• Television licence
• Electricity and gas

• What would be the costs for your event?

Bedfordshire Business School