Break even pricing: Difference between revisions
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'''Break even pricing''' is "the [[price]] where sellers earns zero [[profit]]". It means that this is the point, where revenues are equal to total costs of this [[company]]. Break even point is also called '''BEP'''<ref>(Kotler P., 2010, 322-326)</ref>. | '''Break even pricing''' is "the [[price]] where sellers earns zero [[profit]]". It means that this is the point, where revenues are equal to total costs of this [[company]]. Break even point is also called '''BEP'''<ref>(Kotler P., 2010, 322-326)</ref>. | ||
== Break even analysis == | ==Break even analysis== | ||
We can calculate '''break even volume''' by using the following formula<ref>(Landsburg S., 2010, 192-212)</ref>: | We can calculate '''break even volume''' by using the following formula<ref>(Landsburg S., 2010, 192-212)</ref>: | ||
<math>BEP_{Volume}=\frac{TFC}{Price - VC}</math> | <math>BEP_{Volume}=\frac{TFC}{Price - VC}</math> | ||
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<math>BEP_{Value}=BEP_{Volume} \cdot Price</math> | <math>BEP_{Value}=BEP_{Volume} \cdot Price</math> | ||
It's break even value. For example, Break Even Point | It's break even value. For example, Break Even Point Volume is 30000 and Price is $20. | ||
<math>BEP_{Value}={30000 \cdot {$20}}=$600000</math> | <math>BEP_{Value}={30000 \cdot {$20}}=$600000</math> | ||
It shows what value must reach the sale. If we reach $600000, we also reach break even point. | It shows what value must reach the sale. If we reach $600000, we also reach break even point. | ||
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And we receive percentage break even result. | And we receive percentage break even result. | ||
== Break even pricing method == | ==Break even pricing method== | ||
Break even pricing [[method]] is widely used. By BEP we can calculate and analyse some aspects of our company. We can learn about prices. It helps us to set a good prices. There are some issues, where BEP helps us perfectly<ref>(Jagpal S., 2018, 93-111)</ref>: | Break even pricing [[method]] is widely used. By BEP we can calculate and analyse some aspects of our company. We can learn about prices. It helps us to set a good prices. There are some issues, where BEP helps us perfectly<ref>(Jagpal S., 2018, 93-111)</ref>: | ||
* BEP for pricing '''new products under uncertainty''': New products are focus on downside [[risk]] and ignore upside gains. Hence companies is likely to set a high prices for new products. | * BEP for pricing '''new products under uncertainty''': New products are focus on downside [[risk]] and ignore upside gains. Hence companies is likely to set a high prices for new products. | ||
* BEP for '''risk-averse company''': Companies can use break even pricing to price new products under uncertainty. Companies generally set a high prices for new products. | * BEP for '''risk-averse company''': Companies can use break even pricing to price new products under uncertainty. Companies generally set a high prices for new products. | ||
* BEP for '''risk-differentiated products''': BEP depends of three interacting components: ability to price above break even depends of customers price sensitivity, pricing [[strategy]] depends of [[customer]] segment choices and degree of customer risk aversion. | * BEP for '''risk-differentiated products''': BEP depends of three interacting components: ability to price above break even depends of customers [[price sensitivity]], pricing [[strategy]] depends of [[customer]] segment choices and degree of customer risk aversion. | ||
* BEP for '''calculate profitability''': We can calculate profitability of already developed products. Thanks to BEP we can fit our [[production]] to gain better profit. | * BEP for '''calculate profitability''': We can calculate profitability of already developed products. Thanks to BEP we can fit our [[production]] to gain better profit. | ||
* Potential '''pitfalls for new products''': The company must be careful to include all relevant economic costs. BEP should be based on correct measure of fixed costs, including hidden costs. | * Potential '''pitfalls for new products''': The company must be careful to include all relevant economic costs. BEP should be based on correct measure of [[fixed costs]], including hidden costs. | ||
==Footnotes== | ==Footnotes== | ||
<references />. | <references />. | ||
{{infobox5|list1={{i5link|a=[[Potential market]]}} — {{i5link|a=[[Price sensitivity]]}} — {{i5link|a=[[Cost-plus pricing]]}} — {{i5link|a=[[Contribution margin ratio]]}} — {{i5link|a=[[Duopoly]]}} — {{i5link|a=[[Discriminatory pricing]]}} — {{i5link|a=[[Contribution to sales ratio]]}} — {{i5link|a=[[Market value added]]}} — {{i5link|a=[[Market demand]]}} }} | |||
==References== | ==References== | ||
| Line 55: | Line 43: | ||
* Kotler P. and others, (2010). [https://books.google.pl/books?id=ZW2u5LOmbs4C&dq=break+even+pricing&hl=pl&source=gbs_navlinks_s ''Principles of Marketing''], Pearson [[Education]], p. 322-326 | * Kotler P. and others, (2010). [https://books.google.pl/books?id=ZW2u5LOmbs4C&dq=break+even+pricing&hl=pl&source=gbs_navlinks_s ''Principles of Marketing''], Pearson [[Education]], p. 322-326 | ||
* Landsburg S., (2010). [https://books.google.pl/books?id=_aZmzdlrBZMC&dq=break+even+pricing&hl=pl&source=gbs_navlinks_s ''Price Theory and Applications''], Cengage Learning, p. 192-212 | * Landsburg S., (2010). [https://books.google.pl/books?id=_aZmzdlrBZMC&dq=break+even+pricing&hl=pl&source=gbs_navlinks_s ''Price Theory and Applications''], Cengage Learning, p. 192-212 | ||
[[Category:Financial management]]. | [[Category:Financial management]]. | ||
{{a|Adam Widła}} | {{a|Adam Widła}} | ||
Latest revision as of 18:32, 17 November 2023
Break even pricing is "the price where sellers earns zero profit". It means that this is the point, where revenues are equal to total costs of this company. Break even point is also called BEP[1].
Break even analysis
We can calculate break even volume by using the following formula[2]: Where:
- BEPVolume - Break Even Pricing Volume
- TFC - Total Fixed Cost
- VC - Variable Cost
For example, Fixed Cost is $300000, Price is $20 and Variable Cost is $10. We must sell 30000 units at $20 to break even. And it's break even volume. If we want profit, we must sell more than 30000 units at $20 each. We can also calculate something else:
It's break even value. For example, Break Even Point Volume is 30000 and Price is $20. It shows what value must reach the sale. If we reach $600000, we also reach break even point.
We can calculate percentage break even by using a demand: And we receive percentage break even result.
Break even pricing method
Break even pricing method is widely used. By BEP we can calculate and analyse some aspects of our company. We can learn about prices. It helps us to set a good prices. There are some issues, where BEP helps us perfectly[3]:
- BEP for pricing new products under uncertainty: New products are focus on downside risk and ignore upside gains. Hence companies is likely to set a high prices for new products.
- BEP for risk-averse company: Companies can use break even pricing to price new products under uncertainty. Companies generally set a high prices for new products.
- BEP for risk-differentiated products: BEP depends of three interacting components: ability to price above break even depends of customers price sensitivity, pricing strategy depends of customer segment choices and degree of customer risk aversion.
- BEP for calculate profitability: We can calculate profitability of already developed products. Thanks to BEP we can fit our production to gain better profit.
- Potential pitfalls for new products: The company must be careful to include all relevant economic costs. BEP should be based on correct measure of fixed costs, including hidden costs.
Footnotes
.
| Break even pricing — recommended articles |
| Potential market — Price sensitivity — Cost-plus pricing — Contribution margin ratio — Duopoly — Discriminatory pricing — Contribution to sales ratio — Market value added — Market demand |
References
- Cafferky M., (2010). Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis, Business Expert Press
- Covello J. A. and others, (2006). Complete Book of Business Plans: Simple Steps to Writing Powerful Business Plans, Sourcebooks, Inc.
- Faruqui A. and others, (2012). Pricing in Competitive Electricity Markets, Springer Science & Business Media, p. 17-23
- Jagpal S. and others, (2008). Fusion for Profit: How Marketing and Finance Can Work Together to Create Value, Oxford University Press, p. 93-111
- Kotler P. and others, (2010). Principles of Marketing, Pearson Education, p. 322-326
- Landsburg S., (2010). Price Theory and Applications, Cengage Learning, p. 192-212.
Author: Adam Widła
