Module 6 • The marketing plan 1
Skimming The practice of setting a relatively high introductory price in order to recover research and development costs. The price is later dropped slowly, e.g. old model cell phones that are becoming cheaper.
2 Competitive pricing The price is set just below the competitors’ prices. 3 Cost-plus pricing
The selling price of each unit is determined by calculating the costs and then adding something extra (mark-up%) for profit.
4 Odd pricing This method refers to the often seen example where R29.99 sounds a lot cheaper than R30.
5 “Loss-leader” pricing This involves dropping the price of a few popular products in order to draw customers to the business.
6 Discounts
Discounts are used to introduce a new product, sell old stock or encourage customers to pay. The amount of discount allowed cannot be more than the mark-up amount of the product. That is unless you want to get rid of old stock or use it as a draw card for customers. You are therefore prepared to make a loss on that product, knowing that customers will buy other products which will ensure a profit.
Profit in a business is only profit once all costs (fixed and variable) have been deducted. The business will then have to pay tax and what is left can either go into your pocket or be used to expand the business.
2.3 Calculate the price of a product
You sell live chickens. You buy each chicken for R25 (variable cost). Another variable cost is the transportation of the chickens. You buy 200 chickens at a time and pay R600 for the transport. Thus your variable transport cost is R3 per chicken and your total variable costs per chicken is R28 (R25 + R3).
Your fixed costs per month are: Telephone R 800
Rent of premises R1 000 Salaries Total
R6 000 R7 800
For each chicken you sell, you have to deduct R28 to cover your variable costs (purchase and transport) leaving you the rest or ‘gross profit’ to contribute towards filling your fixed cost ‘hole’. For the moment assume that you would be able to sell each chicken for R48.
PAUSE FOR THOUGHT
Remember, discount reduces your profit by the amount of discount you allow.
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