BUSN 491 Pricing Strategy
k.warren5
PricingStrategyExample2-1.docx
Pricing Strategy
Regent University
Pricing Strategy
The three options I evaluated for a pricing strategy are cost based, restaurant industry pricing, and competition based. It will cost $0.41 to produce each ice cream cone ($0.30 for the ingredients + $0.06 for the flavor burst syrup + $0.05 for the cone). So, my Cost of Goods Sold per Unit is $0.41. My fixed monthly costs are $2,522 ($1,600 for rent + $200 for utilities + $722 for my loan payment).
Cost Based Strategy
I know the cost of producing each unit ($0.41), so I analyzed this strategy with a goal to charge a 200% markup. That is a normal markup in the retail industry, and if I used this strategy my price would be $1.23 per cone. This gives me a Gross Profit per Unit of $0.82.
Breakeven Units - 2,522 / 0.82 = 3,075
At this price, I must sell nearly 3,100 units per month just to cover my operating expenses, and that does not include paying employee’s salaries. This method does not account for my competition’s price, or my customer’s needs and willingness to pay.
Restaurant Industry Pricing
In the food service industry, there is a traditional breakdown many places use for their pricing. 33% covers the Cost of Goods Sold + 33% for labor and overhead expenses + 33% for Gross Profit. Using this, my price would not change from the Cost Based Strategy. My Cost of Goods Sold remains $0.41 regardless of my strategy. So $0.41 (COGS) + $0.41 (Labor/OH) + $0.41 (Gross Profit) = $1.23 per unit.
Breakeven Units - 2,522 / 0.41 = 6,151
Even though the price of my individual unit of sale does not change, I must sell double the number of units to reach my breakeven point each month. The only difference here is that 33% has already been accounted to pay expenses, and the remaining 33% is actually Gross Profit. That explains why I would need to sell double the units, but this breakdown is simple to use, and that is why many restaurants do it. This method does account for the price of my competition, nor my customer’s needs or willingness to pay.
Competition Based Pricing
This is a reactive method of pricing, and it is based off of what my competitors charge. If they have a better product, I price below them. If they have a sub-par product, I price above them. If we are equal but I want to lure them away, I charge a slightly lower price. This is the method I have chosen to use for my forecast. I compiled the data for me two major local competitors. Coldstone Creamery is a high end ice cream shop; they average $5.33 for an ice cream cone, and $5.38 for a shake. Dairy Queen is a cheaper/faster ice cream shop offering a full menu; they average $2.60 for an ice cream cone and $3.93 for a shake. They are both international franchises that have established control over their market segment.
The way an item is priced says a lot to consumers, and is the reason for many business failures. I am trying to sell a premium soft serve ice cream, and I can offer an astonishing 300 flavors from each machine. This gives me something new to offer, and there is not one ice cream shop in Virginia Beach doing this. I consider the product to be inferior to Coldstone, but not much. I consider the product to be superior to Dairy Queen, but I don’t offer a full menu. So, I chose to split the difference, and charge a price right in between both of them. I averaged the prices they charge for various sizes to get my numbers for each franchise, and split the difference to arrive at my price. Under this pricing strategy I would charge $3.95 for an ice cream cone, and $4.65 for a shake. I will only sell 1 size cone and shake, but it will be more in quantity than a medium from either store, and more flavor options than anyone else.
Gross Profit Per Cone = 3.95- 0.41 = 3.54 & Breakeven Units = 2522 / 3.54 = 712
Gross Profit Per Shake = 4.65 – 0.41 = 4.24 & Breakeven Units = 2522 / 4.24 = 595
Using this method, I only need to sell a little more than 1/4 of units I would need to sell using the cost based method, and 1/8 of the units from the restaurant method to meet my breakeven point each month. If I only sold shakes, it would be even less, and any combination of the two is still a much smaller volume of sales. Considering I am trying to sell a high quality soft serve ice cream, I believe that this pricing strategy allows me to reach my goals much faster. I have priced myself equally between two powerful competitors; I am offering a quality close to Coldstone with the speed of Dairy Queen, and a variety neither of them have nor anyone else here. A massive 300 flavor options, with an unbelievable number of combinations, and it’s all possible from 1 machine.
I chose to use the competition based pricing because there are many competitors here, and I evaluated the most successful ones. Cost based pricing did not consider any other factors, and the price set my sales goals too high for a new venture. Restaurant based pricing techniques were very simple, but I needed to sell double the amount to meet the same goals. The competition based pricing factored in my competitors, and their experience in this industry for decades. I did not consider my customers because I am combining two segments of the eating out ice cream market, and I want to reach both with a new product. High quality soft serve ice cream is not commonly sold, and the variety I offer only comes from top of the line machinery. By splitting the difference between the high and low end ice cream shops, I can reach the majority and offer the something new. It has not been done in Virginia Beach yet.
I will submit my entire business plan from Liveplan because I cannot separate the tables from the document. They show that the business can be completely profitable by the end of the first year. Using the competition based pricing plan, if I meet the sales requirements monthly, the business will be able to pay off the loan far in advance of the 3-year deadline. Also, it allows me to maximize my profit potential much sooner, and with many less units being sold than the other pricing methods. You will find tables, charts, and forecasts for all the needed information in that document. Please look at the expectations section for the financial highlights by year, and the financial plan section will hold the rest of the tables and charts needed for this assignment. I could not separate them from the assignment. I have also attached the references that I used to gather my information for making my calculations.
References
http://www.loopnet.com/for-lease/retail/2/?bb=8hx6im5lpHh_8_-uL
http://www.point2homes.com/US/Neighborhood/VA/Virginia-Beach/Ocean-Lakes-Demographics.html
http://simonhouses.com/neighborhoods/virginia/virginia%20beach/red-mill-farm-homes
https://upserve.com/blog/3-ice-cream-marketing-strategies-for-tourist-season/
https://www.vdh.virginia.gov/lhd/rappahan/foodsvcs/
