Contribution Margin Pricing Method

4P's of Marketing

• 1. Product

1. Price

   1. Place

   2. Promotion

Supply and Demand

Pricing Strategies

Simple Mark-Up Pricing Method

This method focuses on the cost of good sold (COGS) and forecasting to determine the mark-up or your good or service. The mark-up is designed to cover all costs and to yield the desired profit. The desired profit could represent:

• • Salary or monies to repay investors or loans

  • Reinvest into new products, technology, advertising

  • Expand business: location, hire more employees, new locations

For the three methods we will be addressing, we are looking at only the cost to acquire or purchase an item. In the following section we will be addressing two methods that take into account expenses such as labor or utility.

Ingredients Mark-Up Method

This method considers all product costs: food costs when pricing food items, beverage costs when pricing beverages or costs to produce/purchase and ship merchandise. Here are three steps to calculate:

• • Determine the ingredients' costs

  • Determine the multiplier to use in marking up the ingredients' costs.

Multiplier = _ 1

Desired Cost Percentage

• • Establish a base selling price by multiplying the ingredients' costs by the multiplier to calculate a final selling price.

Base Selling Price = Ingredients Cost x Multiplier

The Desired Cost Percentage is dependent on several factors: desired profitability, other costs not associated with the product (rent, wages, etc.), and the price individuals are willing to pay. Companies that have been around often look at previous periods of profitability to see the ability to capture profits. This can be useful in determining if products were selling at retail or at highly discounted prices.

Companies first starting out will either use the average (restaurants are typically 25-35% depending on the type) cost percentage, other businesses cost percentage, or use a comparable businesses prices to reverse engineer their cost percentage.

Eg. Competition charges $100/bag, Your Costs are $15/bag

$100 (base selling price) = $15 (cost of bag) x Multiplier

$100 = $15M

M=6.67

We then can apply the multiplier to other products. Just remember, that this is base selling price and not the retail or final price.

The Base Selling Price is not necessarily the final price. Rather, a base selling price is considered a starting point from which other factors must be assessed and the price adjusted accordingly. For instance, your BSP may be $18.85 but you may decide to charge $25 because similar companies are charging that amount.

Think About It: Simple Mark-Up Pricing Method