WEBVTT 1 00:00:02.370 --> 00:00:03.390 Hello and welcome 2 00:00:03.390 --> 00:00:06.873 to the video lecture part one on pricing. 3 00:00:09.990 --> 00:00:11.520 So when we talk about this, 4 00:00:11.520 --> 00:00:14.500 we're gonna talk about three basic parameters 5 00:00:16.050 --> 00:00:18.360 based on your cost, 6 00:00:18.360 --> 00:00:21.990 based on what your competition is doing, 7 00:00:21.990 --> 00:00:25.500 and based on how much your customer is willing to pay. 8 00:00:25.500 --> 00:00:28.830 And then we're gonna talk about a series of basic strategies 9 00:00:28.830 --> 00:00:30.093 and vocabulary. 10 00:00:32.220 --> 00:00:33.510 So why does this matter? 11 00:00:33.510 --> 00:00:36.150 Why does the price that you set matter? 12 00:00:36.150 --> 00:00:37.620 Well, it should be obvious, 13 00:00:37.620 --> 00:00:40.080 but if you set your price too low, 14 00:00:40.080 --> 00:00:41.670 you may not be making money, 15 00:00:41.670 --> 00:00:43.407 you may not be making enough money, 16 00:00:43.407 --> 00:00:45.805 you may not even cover your costs. 17 00:00:45.805 --> 00:00:48.510 If you set your price too high, 18 00:00:48.510 --> 00:00:52.740 it may be that no one will pay it. 19 00:00:52.740 --> 00:00:55.593 And once again, you will lose sales. 20 00:00:57.993 --> 00:01:01.227 So two basic parameters 21 00:01:03.750 --> 00:01:06.810 are the most that you can pay 22 00:01:06.810 --> 00:01:11.151 or the most that you can charge is the ceiling, 23 00:01:11.151 --> 00:01:15.990 is how much will consumers pay for your thing? 24 00:01:15.990 --> 00:01:19.290 And the absolute floor is your costs, 25 00:01:19.290 --> 00:01:23.310 that if you price something below your costs, 26 00:01:23.310 --> 00:01:25.950 you will not make money. 27 00:01:25.950 --> 00:01:28.440 In fact, you will lose money on every sale 28 00:01:28.440 --> 00:01:31.713 and you won't be in the business for long. 29 00:01:34.020 --> 00:01:36.330 And then there's middle ground of 30 00:01:36.330 --> 00:01:38.370 what are your competitors doing? 31 00:01:38.370 --> 00:01:43.230 What are goods or services that are like yours in features, 32 00:01:43.230 --> 00:01:45.510 in attributes, in qualities? 33 00:01:45.510 --> 00:01:47.973 What are the prices of those? 34 00:01:51.420 --> 00:01:53.460 So first we're gonna talk about costs, 35 00:01:53.460 --> 00:01:56.760 and we're gonna think about the two main kinds of costs. 36 00:01:56.760 --> 00:01:59.430 So first, there are variable costs. 37 00:01:59.430 --> 00:02:02.250 So the variable costs vary. 38 00:02:02.250 --> 00:02:06.360 They change depending on how much you produce. 39 00:02:06.360 --> 00:02:10.290 Usually, if you only produce a small amount, 40 00:02:10.290 --> 00:02:11.790 these costs are lower. 41 00:02:11.790 --> 00:02:15.600 If you produce a large amount, the these are more 42 00:02:15.600 --> 00:02:20.600 so you can think about, it's things like labor and inputs. 43 00:02:20.760 --> 00:02:25.310 So, and these inputs might be the seeds for a farmer, 44 00:02:25.310 --> 00:02:29.433 ground coffee for a cafe. 45 00:02:30.360 --> 00:02:33.030 And you can think about that. 46 00:02:33.030 --> 00:02:37.050 The more food that you sell, 47 00:02:37.050 --> 00:02:39.990 the more food, the more inputs, 48 00:02:39.990 --> 00:02:42.090 the more ingredients that you have to buy. 49 00:02:42.090 --> 00:02:45.060 And so your variable costs are higher, 50 00:02:45.060 --> 00:02:49.110 and marketing can be either one. 51 00:02:49.110 --> 00:02:54.110 So if you're spending a certain amount of your revenue, 52 00:02:56.400 --> 00:03:00.630 then it would be a variable cost. 53 00:03:00.630 --> 00:03:04.744 But if you, say, take out an ad for an entire year 54 00:03:04.744 --> 00:03:07.350 or build a big sign, 55 00:03:07.350 --> 00:03:09.633 those would be fixed costs that they don't. 56 00:03:10.921 --> 00:03:12.330 And so the thing about fixed costs, 57 00:03:12.330 --> 00:03:17.130 these don't change no matter how much you produce. 58 00:03:17.130 --> 00:03:20.460 They're also called overhead costs. 59 00:03:20.460 --> 00:03:23.280 So your mortgage, your rent, 60 00:03:23.280 --> 00:03:27.510 the durable equipment that you buy, 61 00:03:27.510 --> 00:03:32.510 a lot of office expenses, they don't change. 62 00:03:32.520 --> 00:03:37.520 So the cost of a stove doesn't change 63 00:03:37.740 --> 00:03:40.800 whether the restaurant sells lots and lots and lots 64 00:03:40.800 --> 00:03:43.053 of meals or very few. 65 00:03:47.520 --> 00:03:51.270 And this can be used in cost-based pricing. 66 00:03:51.270 --> 00:03:54.930 So if you know your costs, you can then figure out 67 00:03:54.930 --> 00:03:57.250 what they are and 68 00:04:00.150 --> 00:04:03.210 divide by the expected volume 69 00:04:03.210 --> 00:04:05.850 and that brings you to your break even. 70 00:04:05.850 --> 00:04:08.949 So again, we talked about what these fixed costs 71 00:04:08.949 --> 00:04:11.100 and variable costs are, 72 00:04:11.100 --> 00:04:14.490 and as you're thinking about your business idea, 73 00:04:14.490 --> 00:04:17.670 think about what would be these costs. 74 00:04:17.670 --> 00:04:20.820 Know that it's much more likely 75 00:04:20.820 --> 00:04:24.720 that you under count them, that there's much more likely, 76 00:04:24.720 --> 00:04:27.810 there's things that you don't account for than 77 00:04:27.810 --> 00:04:30.660 that you account for too many things. 78 00:04:30.660 --> 00:04:31.860 But as we'll see in a bit, 79 00:04:31.860 --> 00:04:34.503 it's important to know your costs. 80 00:04:36.570 --> 00:04:39.330 So two ways that this can be done is 81 00:04:39.330 --> 00:04:43.260 to use a cost plus model where you use a markup or a margin 82 00:04:43.260 --> 00:04:45.840 or target based. 83 00:04:45.840 --> 00:04:48.213 And these are two ways to set your price. 84 00:04:51.090 --> 00:04:54.120 So many retailers do this. 85 00:04:54.120 --> 00:04:58.740 Cost plus is there's a standard markup and margin. 86 00:04:58.740 --> 00:05:03.337 So, and so if you buy something for $20, 87 00:05:04.560 --> 00:05:07.560 and so we call it the COGS 88 00:05:07.560 --> 00:05:10.860 or the cost of goods sold, it costs you 20. 89 00:05:10.860 --> 00:05:14.250 You have a fixed markup of 50%. 90 00:05:14.250 --> 00:05:18.330 So you take that cost, divide it in half, add it on. 91 00:05:18.330 --> 00:05:20.280 So you sell it for 30 92 00:05:20.280 --> 00:05:24.423 and your part of it, your sort of profit or margin, 93 00:05:25.975 --> 00:05:28.210 the amount that you make on it is 1/3 94 00:05:29.307 --> 00:05:32.880 you get 10 and you paid 20 for it. 95 00:05:32.880 --> 00:05:36.270 So your margin is 1/3 of that, 96 00:05:36.270 --> 00:05:38.400 or 1/3 of the final price, 97 00:05:38.400 --> 00:05:42.307 which is 33% or 1/3. 98 00:05:45.630 --> 00:05:48.420 Some farmers that I have worked with in the past 99 00:05:48.420 --> 00:05:51.180 have used this cost, or this target based, 100 00:05:51.180 --> 00:05:53.760 where they think about what do they, 101 00:05:53.760 --> 00:05:56.640 what does it cost them and how much do they make 102 00:05:56.640 --> 00:06:00.060 and what should they or how much do they wish to make 103 00:06:00.060 --> 00:06:03.960 and what do, and therefore what should be the price? 104 00:06:03.960 --> 00:06:08.820 So this is based on a journal article I wrote working 105 00:06:08.820 --> 00:06:12.093 with organic farmers long ago. 106 00:06:13.344 --> 00:06:15.030 But I'll walk you through it. 107 00:06:15.030 --> 00:06:17.970 So there's a farmer named Sue, 108 00:06:17.970 --> 00:06:22.970 and she has 10 acres of fresh produce, 109 00:06:23.250 --> 00:06:26.340 a very large market garden that she sells. 110 00:06:26.340 --> 00:06:28.047 She thinks that she needs at least 111 00:06:28.047 --> 00:06:32.490 $60,000 to make it worth her while, 112 00:06:32.490 --> 00:06:35.100 that may not be enough these days, 113 00:06:35.100 --> 00:06:37.770 but just for the example. 114 00:06:37.770 --> 00:06:40.260 So she needs to net to make 115 00:06:40.260 --> 00:06:43.620 as a profit $6,000 an acre. 116 00:06:43.620 --> 00:06:47.130 And she has 1/4 acre of carrots. 117 00:06:47.130 --> 00:06:51.693 So what should she charge per pound for the carrots? 118 00:06:53.580 --> 00:06:58.580 So she finds out that to grow carrots on 1/4 acre, 119 00:06:58.650 --> 00:07:00.240 here are her costs, 120 00:07:00.240 --> 00:07:03.060 her input costs, her marketing costs, her fixed costs. 121 00:07:03.060 --> 00:07:05.220 So it costs her $1,000 122 00:07:05.220 --> 00:07:09.270 and on average her yield is 4,500 123 00:07:09.270 --> 00:07:11.343 per quarter acre. 124 00:07:12.720 --> 00:07:14.100 She does the math 125 00:07:14.100 --> 00:07:17.460 and sees that it costs her 22 cents a pound 126 00:07:17.460 --> 00:07:19.980 so this is an important figure at the top. 127 00:07:19.980 --> 00:07:22.713 This is her break even price. 128 00:07:24.000 --> 00:07:27.780 And that is if she sold it for this price, 129 00:07:27.780 --> 00:07:28.980 she wouldn't make any money, 130 00:07:28.980 --> 00:07:30.330 but she wouldn't lose any money. 131 00:07:30.330 --> 00:07:34.140 This is, a break even price is that which exactly covers 132 00:07:34.140 --> 00:07:36.060 your costs and no more. 133 00:07:36.060 --> 00:07:40.800 And since she needs 1,400 134 00:07:40.800 --> 00:07:43.560 per quarter acre, 135 00:07:43.560 --> 00:07:46.980 which would be 6,000 an acre on 10 acres is 136 00:07:46.980 --> 00:07:51.510 60,000, she would add these two up 137 00:07:51.510 --> 00:07:54.660 and she should sell her carrots 138 00:07:54.660 --> 00:07:58.050 for at least 56 cents a pound. 139 00:07:58.050 --> 00:08:01.110 But note that that's assumed that she is able 140 00:08:01.110 --> 00:08:05.373 to sell all she grows at that price. 141 00:08:07.740 --> 00:08:12.420 So the advantages of the cost base 142 00:08:12.420 --> 00:08:14.790 is that it's fairly straightforward. 143 00:08:14.790 --> 00:08:18.420 If it's all done right, you'll make money as long 144 00:08:18.420 --> 00:08:21.000 as you sell all of it that you have. 145 00:08:21.000 --> 00:08:23.670 And it stems from, again, this break even analysis. 146 00:08:23.670 --> 00:08:25.308 And it's really important to to know 147 00:08:25.308 --> 00:08:27.730 what your break even is. 148 00:08:27.730 --> 00:08:32.280 The the downside is, is it completely ignores 149 00:08:32.280 --> 00:08:35.070 what might your customer pay? 150 00:08:35.070 --> 00:08:38.371 It might ignore what your competitors charge. 151 00:08:38.371 --> 00:08:42.250 And it doesn't give any signal of quality that in many 152 00:08:43.200 --> 00:08:48.060 times we sort of think of price as a signal of quality. 153 00:08:48.060 --> 00:08:50.634 And if you price something too low, 154 00:08:50.634 --> 00:08:54.607 your customers might think, "What's wrong with this? 155 00:08:54.607 --> 00:08:57.277 "Like this costs less than this other thing, 156 00:08:57.277 --> 00:08:59.307 "this must not be as good." 157 00:09:00.180 --> 00:09:01.953 So that's also ignored. 158 00:09:04.590 --> 00:09:08.193 Why is it important for a business to know its costs? 159 00:09:11.370 --> 00:09:15.850 This is something that I would like you to think about and 160 00:09:21.450 --> 00:09:22.283 to ponder. 161 00:09:24.000 --> 00:09:26.070 So that is the end of part one. 162 00:09:26.070 --> 00:09:27.453 Please go to part two.