Product managers all want to know what the best way to price their product is. However, we've never been trained on how to go about doing this. All too often we fall back on the product manager's old friend – cost plus pricing. It turn out that this is the wrong type of pricing for us to be using. It's not going to help our product to be successful. Dr. Jim Anderson takes the time to carefully show why cost plus is the wrong way to price your product, and then he shows you the right way to do it. For more information on Dr. Jim Anderson and his company, Blue Elephant Consulting, find out more on the web at http://www.BlueElephantConsulting.com

1. Product Pricing:
Cost Plus Is Wrong,
So What's Right?
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2. Let’s Talk About (Dog) Sweaters
What are your costs?
• Variable:
•Yarn
•Knitting
•Shipping
• Fixed:
•Web site
•Marketing
•Knitting machine
All Image (c) 2007 - 2009
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3. The Problem With Cost Plus Pricing
Your Product
$10
Cost Your Competition’s
$5 Product
Quantity
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4. Sales & Finance Seem To Always Want
You To Change Your Product’s Price
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5. Price Changes: This Is When Things Start
To Get Tricky...
$10 per dog sweater
4,000 units sold
$10 x 4,000 = $40,000 total revenue P1=
$10.00
$5.50 variable cost per dog sweater
Margin
$5.50 x 4,000 = $22,000 in variable costs
VC =
$40,000 - $22,000 = $5.50
$18,000 total margin Variable
Costs
Sales Volume =
4,000
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6. Breakeven Analysis: Would A 5% Price
Cut In Dog Sweaters Boost Profits?
$0.50 x 4,000 = $2,000
P1= $10.00
Lost Margin
P2= $ 9.50 Additional
Margin ? Margin Due
VC = To Volume
$5.50
Additional
Variable ? Variable
Costs
Costs
Sales Sales
Volume Volume
= 4,000 =?
Rule: ? > LM = Price Cut Is A Good Idea
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7. Breakeven Analysis: A Definition
Breakeven analysis allows you to calculate the minimum
number of additional sales that you are going to have to
make in order to make up for the price change.
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8. How To Calculate The Minimum Sales
Change Needed To Keep Things The
Same
% Breakeven sales change = - Price Change
CM + Price Change
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9. How Many More Dog Sweaters Would
We Have To Sell If We Cut Prices By 5%?
CM = $10 - $5.50 = $4.50
% Breakeven sales change = - Price Change
CM + Price Change
= -(-$0.50) = 0.125 = 12.5%
$4.50 + (-$0.50)
Breakeven sales volume = 0.125 x 4,000
= 500 dog sweaters
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10. What Happens If We Cut The Price AND
Our Variable Costs Go Down At The Same
Time?
% Breakeven sales change = - (Price Change - VC Change)
CM + (Price Change - VC Change)
P1= $10.00
Lost Margin
P2= $ 9.50 Additional
Margin ? Margin Due
VC = To Volume
$5.50 VC Reduction Margin
Additional
Variable ? Variable
Costs
Costs
Sales Sales
Volume Volume
= 4,000 =?
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11. How Many More Dog Sweaters Would
We Have To Sell If We Cut Prices By 5%
AND Our Variable Costs Decreased By
$0.22?
% Breakeven sales change = - (Price Change - VC Change)
CM + (Price Change - VC Change)
= -(-$0.50 - (-$0.22))
$4.50 + (-$0.50 - (-$0.22))
= 0.066 = 6.6%
Breakeven sales volume = 0.066 x 4,000
= 265 dog sweaters
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12. One More: What Happens If We Cut The
Price AND Our Fixed Costs Go Up At The
Same Time?
If you only had a new fixed cost & no price change:
% Breakeven sales change = $ Change In Fixed Costs
$ CM
% Breakeven sales change =
- (Price Change - VC Change) + $ Change in fixed costs
CM+(Price Change-VC Change) CM+(Price Change-VC Change)x Initial Unit Sales
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13. How Many More Dog Sweaters Would
We Have To Sell If We Cut Prices By 5%
AND Our Fixed Costs Increased By $800?
% Breakeven sales change =
- (Price Change - VC Change) + $ Change in fixed costs
CM+(Price Change-VC Change) CM+(Price Change-VC Change)x Initial Unit Sales
= 0.125 + $800 = 0.175 = 17.5%
$4 x 4,000 units
Breakeven sales volume = 0.175 x 4,000
= 700 dog sweaters
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14. A Quick Summary...
Breakeven analysis allows you to calculate the minimum
number of additional sales that you are going to have to
make in order to make up for the price change.
% Breakeven sales change = - Price Change
CM + Price Change
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