Earlier in the year we conducted a dragons den competition for which you were highly successful. Your challenge today is to prepare yourselves as a class to answer exam style questions on these three areas. We will use your dragons den information later in the week.
As part of this today you will start with the theory today dividing up to learn about the following:
Group 1 (Suleyman & Brenden)
- Different Pricing strategy's ADV's & Dis-ADV's
- Revenue, Fixed & Variable Costs.
Group 2 (Harley & Medis)
- What is break-even revenue and how can an SME work it out?
- How do we work out "Desired margin of safety" and why is it important for entrepreneurs to consider?"
You each need to prepare a fully informative comment on this post covering everything we need to know about these areas for the exam.
In Mondays lesson we will begin with a break-even starter demonstrated by Harley and will be using the research and practical information gathered in your Dragons Den project to demonstrate your knowledge so make sure this data is gathered together in readiness.
A break even chart is a graph used to estimate when the total sales revenue will equal total costs; the point where loss will end and profit will begin to accumulate. To be able to work out the break even point , the SME must be able to know its prices and and estimation of the number of output.
ReplyDeleteTo find the prices , the business must perform a market research and find the most preferred price that people will accept to buy your products at. Then using the market research , the business can find out the demand available for their product. After finding the prices and the demand they can use them to make the break even chart .
The x axis must be labelled as output and they must show how much output they estimate to sell. The y axis is the revenue axis. The break even chart consists of 3 line . a) Total revenue b) total cost and c) fixed cost . Using the prices and the estimation of the amount they are going to sell ,the business can calculate their revenue. They can then use the estimation of output to find variable costs and then add to the fixed cost and find the total cost . The point where the total revenue exceeds the total cost is the break even point and using the graph , the business can pin point the number of output it needs to sell to be able to break even - according to the estimations.
Pricing strategies.
ReplyDeleteNow, there are numerous types of pricing strategies that a business would take into account when putting their good to the market.
One pricing strategy would be Cost-plus pricing. This is when the business calculates the cost of making the product and add a percentage on it (profit). This is a risky strategy. The business first have to take in market research to see if the demand is present. If the business set a percentage over the cost of producing the good, customers may not be willing to purchase it. Therefore the business must see whether the demand will be present.
Another pricing strategy is penetration pricing.
Penetration pricing is when the good enters the market at a low price. This is done to gain higher demand over competitors. However the business could be making a loss for a long period of time before breaking even.Over a period of time the business may begin to raise prices as they already have gained customer loyalty. As a result breaking even, or making profit.
Price Skimming. This is were the good enters the market at a high price. This could be done because of the business having a competitive advantage. This strategy is also sometimes used to break even through lower sales. However, price skimming usually attracts new competitors and as a result bringing the price back down due to increased supply.
Psychological pricing. This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. An example would be selling a good for 0.99 cents instead of a dollar. This is used as it may make it seem much more cheaper.
Promotional pricing. This is when the pricing is used to promote the product. An example would be 'BOGOF', 'Buy one get one free, or another example, money off vouchers and discount.
A fixed cost is a cost that does not vary with output.An example of this could be rent,as rent is payed at a fixed rate regardless of how much the business sells.
ReplyDeleteA variable cost is a cost that does vary with output. An example of this could be delivery costs, as only the number of goods produced need to be delivered, so if less goods are produced less will be needed to spend on delivery as there is less to deliver.
Revenue is the amount of money that is brought into a company by its business activities
The margin of safety is the difference between the number of units of planned or actual sales and the number of units of sales at break even point.
ReplyDeleteso if a business plans to make 20 car sales and thei breakeven number of sales is 16, then their margin of safety is 4. The business would be able to sell 4 less than planned before they were in danger of making a loss.
it's important for entrepreneurs to consider as it gives them an amount that they know they can lose.It helps the management to estimate how much their estimated sales can be reduced to even achieve some kind of profit from production and sales,or how much costs can increase to the point where the company can still make a profit.
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