-: Hello and welcome
to the video lecture part one on pricing.
So when we talk about this,
we're gonna talk about three basic parameters
based on your cost,
based on what your competition is doing,
and based on how much your customer is willing to pay.
And then we're gonna talk about a series of basic strategies
and vocabulary.
So why does this matter?
Why does the price that you set matter?
Well, it should be obvious,
but if you set your price too low,
you may not be making money,
you may not be making enough money,
you may not even cover your costs.
If you set your price too high,
it may be that no one will pay it.
And once again, you will lose sales.
So two basic parameters
are the most that you can pay
or the most that you can charge is the ceiling,
is how much will consumers pay for your thing?
And the absolute floor is your costs,
that if you price something below your costs,
you will not make money.
In fact, you will lose money on every sale
and you won't be in the business for long.
And then there's middle ground of
what are your competitors doing?
What are goods or services that are like yours in features,
in attributes, in qualities?
What are the prices of those?
So first we're gonna talk about costs,
and we're gonna think about the two main kinds of costs.
So first, there are variable costs.
So the variable costs vary.
They change depending on how much you produce.
Usually, if you only produce a small amount,
these costs are lower.
If you produce a large amount, the these are more
so you can think about, it's things like labor and inputs.
So, and these inputs might be the seeds for a farmer,
ground coffee for a cafe.
And you can think about that.
The more food that you sell,
the more food, the more inputs,
the more ingredients that you have to buy.
And so your variable costs are higher,
and marketing can be either one.
So if you're spending a certain amount of your revenue,
then it would be a variable cost.
But if you, say, take out an ad for an entire year
or build a big sign,
those would be fixed costs that they don't.
And so the thing about fixed costs,
these don't change no matter how much you produce.
They're also called overhead costs.
So your mortgage, your rent,
the durable equipment that you buy,
a lot of office expenses, they don't change.
So the cost of a stove doesn't change
whether the restaurant sells lots and lots and lots
of meals or very few.
And this can be used in cost-based pricing.
So if you know your costs, you can then figure out
what they are and
divide by the expected volume
and that brings you to your break even.
So again, we talked about what these fixed costs
and variable costs are,
and as you're thinking about your business idea,
think about what would be these costs.
Know that it's much more likely
that you under count them, that there's much more likely,
there's things that you don't account for than
that you account for too many things.
But as we'll see in a bit,
it's important to know your costs.
So two ways that this can be done is
to use a cost plus model where you use a markup or a margin
or target based.
And these are two ways to set your price.
So many retailers do this.
Cost plus is there's a standard markup and margin.
So, and so if you buy something for $20,
and so we call it the COGS
or the cost of goods sold, it costs you 20.
You have a fixed markup of 50%.
So you take that cost, divide it in half, add it on.
So you sell it for 30
and your part of it, your sort of profit or margin,
the amount that you make on it is 1/3
you get 10 and you paid 20 for it.
So your margin is 1/3 of that,
or 1/3 of the final price,
which is 33% or 1/3.
Some farmers that I have worked with in the past
have used this cost, or this target based,
where they think about what do they,
what does it cost them and how much do they make
and what should they or how much do they wish to make
and what do, and therefore what should be the price?
So this is based on a journal article I wrote working
with organic farmers long ago.
But I'll walk you through it.
So there's a farmer named Sue,
and she has 10 acres of fresh produce,
a very large market garden that she sells.
She thinks that she needs at least
$60,000 to make it worth her while,
that may not be enough these days,
but just for the example.
So she needs to net to make
as a profit $6,000 an acre.
And she has 1/4 acre of carrots.
So what should she charge per pound for the carrots?
So she finds out that to grow carrots on 1/4 acre,
here are her costs,
her input costs, her marketing costs, her fixed costs.
So it costs her $1,000
and on average her yield is 4,500
per quarter acre.
She does the math
and sees that it costs her 22 cents a pound
so this is an important figure at the top.
This is her break even price.
And that is if she sold it for this price,
she wouldn't make any money,
but she wouldn't lose any money.
This is, a break even price is that which exactly covers
your costs and no more.
And since she needs 1,400
per quarter acre,
which would be 6,000 an acre on 10 acres is
60,000, she would add these two up
and she should sell her carrots
for at least 56 cents a pound.
But note that that's assumed that she is able
to sell all she grows at that price.
So the advantages of the cost base
is that it's fairly straightforward.
If it's all done right, you'll make money as long
as you sell all of it that you have.
And it stems from, again, this break even analysis.
And it's really important to to know
what your break even is.
The the downside is, is it completely ignores
what might your customer pay?
It might ignore what your competitors charge.
And it doesn't give any signal of quality that in many
times we sort of think of price as a signal of quality.
And if you price something too low,
your customers might think, "What's wrong with this?
"Like this costs less than this other thing,
"this must not be as good."
So that's also ignored.
Why is it important for a business to know its costs?
This is something that I would like you to think about and
to ponder.
So that is the end of part one.
Please go to part two.