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  • Well now that we've actually gone ahead and discussed pricing objectives as well as the

  • strategy piece, how are we going to achieve those objectives, it's important that we discuss

  • the actual specifics related to pricing. There are a number of tools that can be used as

  • a way of fine tuning the actual pricing. Businesses have to consider a lot of different things

  • if their going to price their going to price their products not only competitively, but

  • also to the point where they're going to cover a lot of their costs. And so one of the easiest

  • ways, or easiest tools that you can utilize is what we call a breakeven analysis. And

  • a breakeven analysis is simply a process that's used to determine the number of units that

  • you would have to sell to cover your costs. So I'll abbreviate the breakeven point as

  • BP. And so we're going to refer to the number of units that are needed to cover our costs.

  • And so ideally as a business you wouldn't just sell whatever this number is because

  • you're covering your costs you're not necessarily making any money. Ideally you'd be able to

  • sell more than this. And so this is a great starting point for a discussion, to know that

  • well is it feasible for us to sell this number of products and if it is great. If it isn't

  • though what are some of the things that we can do? What are the variables that we can

  • change so that it is a little more reasonable. So lets go through let me show you first what

  • the equation is for a breakeven point. And the breakeven point is simply first your fixed

  • cost. Fixed costs do not vary over time within a certain relevant range. And so these often

  • include things that plants, property, and equipment and even advertising, insurance,

  • and taxes. These are commonly fixed costs. The reason that they're fixed is because they

  • don't vary based on the number of products that you sell. So if I sell nothing, I know

  • I still have to pay utilities. I still have to pay the lease for the property I'm using.

  • I still have to pay certain insurance costs and different things. I still pay advertising.

  • And so they're fixed, they don't vary based on production. So I take my fixed cost and

  • then what I do is I divide that by first my price of my product so whatever is the selling

  • price for my product. What consumers have to give up to obtain my product less variable

  • costs what I'll abbreviate as VC. Variable costs, contrary to fixed costs, vary based

  • upon the number of units produced. So if you produce five of a particular product then

  • ultimately you're going to take your fixed costs and multiple it by five. So they go

  • up with every unit that is produced. Typically variable costs include things like direct

  • materials, and so the materials that actually went into assembling that product. Typically

  • includes direct labor. And so the actual people that assembled the product and put it together.

  • Obviously the more time they spent is based upon how much you produce. So those are all

  • things that you would essentially consider in variable costs and then a few other things.

  • So let me show you how you would actually work this here. Lets say that we actually

  • produce cell phone cases and we have a fixed cost of five hundred thousand dollars. These

  • are the costs that we incur without any production whatsoever. Whatever this is, plants, property,

  • equipment, advertising, taxes, those types of things do not vary based upon how many

  • goods we sell. And we sell these cell phone cases for lets just say twenty dollars each

  • and it costs us about ten dollars in variable costs to make them. So for every case we can

  • sell for twenty we pay ten dollars to actually have it made. So with this equation we would

  • actually have a breakeven point of fifty thousand units. Whether or not this is attractive will

  • depend on a number of different factors. You make look at this say I have to produce fifty

  • thousand or sell not product, but sell fifty thousand of these cases in order for me just

  • to cover the costs that I have. In large part that's driven by the fixed costs which are

  • rather high, but that may not be feasible. Or it may be fifty thousand, that's nothing,

  • I was going to sell way more than that or I'm projected to sell a lot more than that.

  • In that case this might be very encouraging. But if it's not. If this is somewhat of a

  • concern. If you planning well I thought I was going to sell about five thousand the

  • first year not fifty thousand I don't want to be in the you know negative for an extended

  • period of time. That doesn't necessarily mean that you should you know scrap everything

  • and go back the drawing board. This is a starting point for a good discussion, and the reason

  • is that you might be able to change a couple of these variables. There are three variables

  • that are here, fixed cost, price, and variable cost. And so maybe we can actually change

  • things. We can do a couple of different things. Maybe we have the ability to actually raise

  • our price a a little bit. Maybe we're not priced competitively, we're under-cutting

  • ourselves. So if we raise price that means our margins are better, which in turn means

  • that we don't need to sell as many products to actually break even. The break even point

  • would be less than fifty thousand units. So that's one thing that we can look at. We can

  • look at possibly reducing our fixed costs. Thing like the actual plant that we're using.

  • Maybe it's too big for us. Maybe we can actually downsize, get a smaller plant, still be able

  • to produce effectively and efficiently but now we're lowering our fixed costs. Maybe

  • we need to reduce our advertising expenditures. Maybe we need to reduce the utilities that

  • we pay that would be kind of similar to reducing our plant size we probably wouldn't pay as

  • much in utilities. And so if you lower your fixed costs that would also make it so that

  • you wouldn't need to sell as many products to just break even. And then lastly we can

  • lower those variable costs. The costs that are directly associated with producing products.

  • And so this can include maybe finding less expensive materials to go into the product.

  • Obviously try not to sacrifice quality to any significant degree. We can try and find

  • more efficient ways of producing the product. So maybe we don't have to pay as much in labor

  • to produce them. We find cheaper ways to do that maybe faster ways to do that. So those

  • are some things that you could consider. Raising prices, decreasing variable costs, decreasing

  • fixed costs. The important thing is that these three areas here are variables that you can

  • change, but you may not be able to change them significantly enough to make the breakeven

  • point reasonable based upon your business. But it at least is a starting point for a

  • discussion. And so just because the breakeven point is maybe a little higher than you originally

  • anticipated you can at least thing through well what are some of the different ways that

  • we can change it so ultimately maybe it is a little more attractive. But by no means

  • would you look at the breakeven point and then simply stop at that point. You can go

  • a little further and do a little more research in those different types of things, but a

  • very useful tool very easy to use very basic. You'll probably spend more time adding up

  • all the fixed and variable costs and determining you know what is fixed versus variable than

  • actually solving the equation, but very very valuable going forward to help you price your

  • products.

Well now that we've actually gone ahead and discussed pricing objectives as well as the

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A2 US fixed sell variable product price point

Episode 59: How to Conduct a Breakeven Analysis

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    陳虹如 posted on 2017/06/23
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