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pricing strategy - Cost based pricing - Cost plus pricing and markup pricing - YouTube
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So as we stated in our previous videos,
there are many pricing strategies,
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numerous for us to go
over them in detail with videos.
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Many of these strategies, however,
can be grouped together in common themes.
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And in this video,
we will be discussing one such group
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called Cost Based Pricing Strategies.
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Now, I asked you this question
in another video about pricing where
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I talked about the maximum and the minimum
possible price for a product.
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So what is the lowest price
that a company will set for its products?
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OK, let me make this simple for you
and ask you this question.
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If you bought this Tostitos
or if you were selling this Tostitos,
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how much would be the lowest price
that you would be willing
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to sell this product for. Now,
if you bought this for ¤5
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and someone asked you
to sell this bottle to them?
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What would be the lowest price you as
a businessman would sell this to him for?
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Well, of course,
if you sell it for less than ¤5,
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which is what it cost you,
you would be losing money.
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If you sold it for more than ¤5, then
you would certainly be making a profit.
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So based upon that information,
we can see that the minimum price
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that you would accept is ¤5,
which is what it cost you.
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All businesses are similar in that regard.
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Everybody wants to make a profit, but
at worst they do not want to incur losses.
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Therefore, the minimum price
is going to be based
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on the total cost for the company
to get that product to you.
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If you look at that bottle of Tostitos,
the total cost will include
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the product cost, which would include
the raw materials labor cost.
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It would include the factory
fixed cost insurance, cost
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utilities, distribution
cost to get the product to the retailers
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and the marketing costs
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to advertise and market
the product to the consumers as well.
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So there are many costs
that will go into the equation.
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So pricing strategies that are designed
keeping this very important
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minimum cost in mind are called cost based
pricing strategies.
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Now there are a few of these
pricing strategies that we will discuss.
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The first one is cost plus pricing
strategy, as the name suggests.
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However, for the cost plus pricing
strategy, it just requires you to add
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the profit on top of the cost
to come up with the price for the product.
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For example, if the Tostitos bottle cost
you ¤5 and you wanted to get a 50% profit,
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you would price it at ¤5 plus 50% of
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¤5, which would be ¤7.50.
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Also, when we talk about cost
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based pricing strategy and cost
plus pricing strategy, another term
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that is widely used in the retail industry
in particular is called
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the Markup Pricing Strategy.
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Now, markup is just the profit
that you want to get from the sale.
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So in the example that we discussed
earlier, you get ¤2.50 profit,
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which was a markup of ¤2.50.
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However, the markup percentage is
is calculated based on the selling price,
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which is ¤7.50, and not the cost,
which is ¤5. So the markups.
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So the markup of ¤2.50 on ¤7.50
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would translate into a 33.33% markup.
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So you can calculate the market price
using the following formula.
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So the market price equals
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unit costs divided by one minus
the desired percent as profit,
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if we desire 33.32% markup,
then we would have ¤5, which is the unit
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cost divided by one minus point 33,
which would be the markup that we want,
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which gives us ¤5 divided by points
666 is around ¤7.50.
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Now, as we already stated, cost
plus pricing and markup
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pricing are not the only cost
based pricing strategies.
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There are other pricing strategies
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that can be considered a part of the cost
based pricing strategy,
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as well as many other numerous
pricing strategies that a company can use.
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Some of those are based upon competitors.
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Some of those are based upon consumers,
while some of those are based
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upon the objectives that the companies
might have that they want to fulfill.
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Now, to learn more about
all of the different pricing strategies,
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as well as anything related to marketing,
please watch my other videos as well.
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Thank you so much for watching.
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