Today you work out how Five Star's price for a full head of foils is set, from what a foil job costs Five Star and the profit Five Star wants. Then you use the price in an income statement and a break-even analysis.
Eleven sections, about an hour and ten minutes all up. One section is one sitting. Do that one and stop.
Three from the lessons so far. Have a go before you open them.
The total costs are $2,040.00 for the week.
The break-even point is 11 foil jobs a week. The break-even point is the level of sales where the sales revenue equals the total costs. The break-even formula gives 10.4 foil jobs. Five Star cannot do part of a foil job, so the break-even point rounds up to 11.
Five Star's pūtake is to make a profit. A pūtake is the reason an organisation exists.
Five Star had $4,800.00 saved. Five Star wanted two things: Option A, a website with a booking page and three months of advertising, and Option B, refitting the front of the salon.
Option A cost $3,400.00 and Option B cost $4,600.00. What could Five Star pay for?
Scarcity is when people want more than they can have, because their money, time and materials are limited. People have unlimited wants but limited means (money, time and materials), so people have to make decisions on what to prioritise.
Because of scarcity, Five Star had to decide which option to pay for.
How much should Five Star charge for a full head of foils, cut and blow wave? There are many ways to decide a price. This section shows one of them, called cost-plus.
The table works out the price of a foil job for a projected week, which has not happened yet.
The mark-up is the amount added to the full cost to get the price. Here the mark-up is the profit on one foil job, $20.00.
Drag the slider to change the profit objective.
Cost-plus
The full cost stays at $170.00, and only the mark-up changes. The slider keeps Five Star at 12 foil jobs a week at every price.
Show how the profit is added to the cost to get the price.
In a projected week of 12 foil jobs, a foil job costs Five Star $170.00. Five Star's profit objective of $240.00 a week is $20.00 a job, so the price is $190.00.
A foil job's variable costs are $40.00, so at $190.00 Five Star makes $150.00 of profit on a foil job.In the projected week, the $150.00 also has to pay the job's share of the rent and Sanjay's pay. Only $20.00 of it is profit.
Cost-plus is a pricing strategy: a way of choosing a price. A projected income statement uses the same figures as cost-plus: the costs, the price and the profit. A break-even analysis adds one new figure: the break-even point, the number of foil jobs Five Star needs to cover its costs.
Drag the sliders. The price, the income statement and the break-even point all change together.
Cost-plus, then two models
| Five Star's projected income statement for one week of 12 foil jobs | |
|---|---|
| Foil jobs12 foil jobs × $190.00 | $2,280.00 |
| Sales revenue | $2,280.00 |
| less Colour12 foil jobs × $28.00 | $336.00 |
| less Power12 foil jobs × $4.50 | $54.00 |
| less Water12 foil jobs × $1.50 | $18.00 |
| less Laundry12 foil jobs × $6.00 | $72.00 |
| less Sanjay's pay40 hours × $24.00 | $960.00 |
| less Rent | $600.00 |
| Total costs | $2,040.00 |
| Profit for the week, before company tax | $240.00 |
The profit for the week is $240.00, the same as Five Star's profit objective.
Five Star expects 12 foil jobs a week, 1 more than the break-even point.
Use your pricing strategy together with a model, such as a projected income statement or a break-even analysis. A pricing strategy on its own may not give enough evidence to meet the standard.
In a projected week of 12 foil jobs, the full cost of a foil job is $170.00 and the mark-up is $20.00, so the price is $190.00. The projected income statement shows a profit of $240.00 for the week. The break-even point is 11 foil jobs a week, and Five Star expects 12.
Five Star uses cost-plus, so the price is $190.00.
Cost-plus uses Five Star's costs. Five Star also has other information that can support the price of a foil job.
Financial information is information in dollars about an organisation's own costs, revenue or profit.
Non-financial information is information that is not an amount in dollars of the organisation's own costs, revenue or profit. A survey of clients, other businesses' prices and the pūtake are non-financial information.
The full cost of a foil job is $170.00.
Drag the card onto its box, or tap the box it goes in.
Press a piece of information to see what it shows and what it cannot show.
Two other salons nearby charge $175.00 and $210.00 for a full head of foils, cut and blow wave. Setting a price close to other businesses' prices is called competitive pricing.
The costs first, then the other informationIn a projected week of 12 foil jobs, a foil job costs Five Star $170.00, and Five Star adds $20.00 of profit, so the price is $190.00. Other salons charge $175.00 and $210.00, so $190.00 is between the prices clients already pay at other salons.
Other salons' prices on their ownFive Star charges $190.00 because other salons charge $175.00 and $210.00.The sentence never shows that $190.00 covers Five Star's costs and leaves a profit.
Now see:
Show first that the price covers the costs and leaves a profit. Then support the price with non-financial information, such as a survey or other organisations' prices.
Cost-plus is not the only pricing strategy. Three more are price skimming, psychological pricing and penetration pricing.
Cost-plus is the only strategy on this page that works out the costs first to determine the price. You should always start with cost-plus, and then use the other strategies as supplementary strategies.
Once cost-plus shows that the price covers the costs, Five Star can apply another strategy. At a psychological price of $189.99, a foil job still leaves $19.99 of profit over its $170.00 full cost. The week's profit is $239.88, just below the profit objective of $240.00.
Price skimming, psychological pricing and penetration pricing do not show that a price covers the costs and leaves a profit.
In a projected week of 12 foil jobs, a foil job costs Five Star $170.00, and Five Star adds $20.00 of profit, so the price is $190.00. The projected income statement shows a profit of $240.00 for the week.
Five Star charges $189.99, because $189.99 looks cheaper than $190.00.
The sentence does not show that the costs are covered. The sentence uses psychological pricing and says nothing about Five Star's costs.
The sentence shows that the costs are covered and a profit is left. The sentence starts from the full cost and adds the profit, which is cost-plus.
The sentence does not show that the costs are covered. The sentence uses price skimming and gives no costs and no profit.
The sentence shows that the costs are covered and a profit is left. The projected income statement takes every cost away from the sales revenue and leaves a profit of $240.00.
The sentence does not show that the costs are covered. The sentence uses penetration pricing and gives no costs and no profit.
Use the same figures in your write-up as in your working.
A write-up with every figure in it1 · How the price was set: Five Star set the price of a full head of foils by cost-plus. 2 · The full cost: in a projected week of 12 foil jobs, the total costs are $2,040.00, so the full cost of one foil job is $170.00. 3 · The price: Five Star's profit objective is $240.00 a week, which is $20.00 a job, so the price is $190.00. 4 · The profit: the projected income statement shows a profit of $240.00 for the week. 5 · The break-even point: the break-even point rounds up to 11 foil jobs a week, 1 fewer than the 12 foil jobs Five Star expects. 6 · The support: in a survey, 17 of 20 clients said they would pay $190.00, and other salons charge $175.00 and $210.00.
No figuresI used cost-plus, so the price covers the costs and leaves a profit.The sentence gives no cost, no profit and no price, so nothing in it can be checked.
The questions this lesson makes people ask, answered simply.
Yes, the mark-up can be a percentage or a dollar amount. A percentage mark-up is the mark-up divided by the full cost, times 100. For a foil job, the percentage mark-up is $20.00 ÷ $170.00 × 100 = 11.8%.
Five Star keeps $190.00 because a higher price makes more profit only if enough clients still book. Cost-plus and the income statement both assume 12 foil jobs a week. In the survey, only 6 of the 20 clients asked would pay $210.00, so at $210.00 Five Star might not get 12 foil jobs a week.
Each of these sentences loses a mark. Work out what is wrong before you open the answer.
The problem. Psychological pricing starts from a price already chosen. The answer never shows that the price covers the costs and leaves a profit.
Cost-plus shows that the price covers the costs and leaves a profit. Psychological pricing does not.
In a projected week of 12 foil jobs, a foil job costs Five Star $170.00, and Five Star adds $20.00 of profit, so the cost-plus price is $190.00. Five Star then uses psychological pricing and charges $189.99, because $189.99 looks cheaper than $190.00. At $189.99, a foil job still leaves $19.99 of profit.
Set the price by cost-plus first. Psychological pricing comes after cost-plus.
The problem. Other salons' prices cannot show that $190.00 covers Five Star's costs.
The other salons' costs may be different from Five Star's costs.
In a projected week of 12 foil jobs, a foil job costs Five Star $170.00, and Five Star adds $20.00 of profit, so the price is $190.00. Other salons charge $175.00 and $210.00, so $190.00 is between the prices clients already pay at other salons.
Show the costs and the profit first, then use the other salons' prices.
The problem. The cost-plus working is right, but the answer uses no second model.
A pricing strategy on its own may not give enough evidence.
Five Star uses cost-plus. In a projected week of 12 foil jobs, the full cost is $170.00 and the mark-up is $20.00, so the price is $190.00. The projected income statement for 12 foil jobs shows a profit of $240.00 for the week. The break-even point is 11 foil jobs a week, 1 fewer than the 12 foil jobs Five Star expects.
Use a second model with cost-plus, such as a projected income statement or a break-even analysis.
The words this lesson introduced, each with an example that is right and one that is not.
ScarcityFive Star wanted Option A at $3,400.00 and Option B at $4,600.00, and had $4,800.00, so Five Star could pay for only one option.
Not scarcity (but a cost)“Five Star's rent is $600.00 a week.” A cost on its own is not a choice between two wants.
Not cost-plus (but other salons' prices)“Five Star charges $190.00 because other salons charge $175.00 and $210.00.” Cost-plus starts from Five Star's own costs.
A mark-upThe mark-up is the $20.00 added to the $170.00 full cost of a foil job.
Not a mark-up (but the price)“The mark-up is $190.00.” $190.00 is the price; the mark-up is what was added to the cost.
A profit objectiveFive Star wants the foil jobs to make $240.00 of profit a week.
Not a profit objective (but a wish with no amount)“Five Star wants to make a good profit.” A profit objective has an amount and a period.
A projected income statementFive Star's statement for a projected week of 12 foil jobs shows sales revenue of $2,280.00, total expenses of $2,040.00 and a profit of $240.00.
Not a projected income statement (but last week's statement)An income statement for last week. Last week has happened, so its statement is not projected.
A pricing strategyCost-plus: the full cost of a foil job plus the profit wanted.
Not a pricing strategy (but a price)$190.00. $190.00 is the price a strategy gives.
A full costIn a projected week of 12 foil jobs, the full cost of a foil job is $40.00 plus $130.00, which is $170.00.
Not the full cost (but the variable costs alone)$40.00. The share of the fixed costs is missing.
Price skimmingFive Star prices a new treatment high while it is new, then lowers the price.
Not price skimming (but penetration pricing)A low price when a salon first opens. Price skimming starts high, not low.
Psychological pricing$189.99 instead of $190.00.
Not psychological pricing (but cost-plus)The full cost of $170.00 plus $20.00 of profit. A price built from the full cost and the profit is cost-plus.
Penetration pricingA low price for foils when a salon first opens, raised once clients come back.
Not penetration pricing (but price skimming)A high price for a new treatment. Penetration pricing starts low, not high.
Competitive pricingFive Star sets its price between the $175.00 and $210.00 that two other salons nearby charge.
Not competitive pricing (but psychological pricing)$189.99 instead of $190.00. $189.99 is set just below a round number, not from other businesses' prices.
Financial informationThe full cost of a foil job is $170.00.
Not financial information (but a survey)In a survey, 17 of 20 clients said they would pay $190.00. The survey records what clients say, not Five Star's own costs or profit, so the survey is non-financial information.
Non-financial informationFive Star's pūtake is to make a profit.
Not non-financial information (but a cost)Five Star's rent is $600.00 a week. The rent is one of Five Star's own costs, so the rent is financial information.
These four tasks use Five Star's figures from this lesson.
| Foil jobs in the projected week | 12 |
| Fixed costs, each week (rent and Sanjay's pay) | $1,560.00 |
| Variable costs, each foil job | $40.00 |
a.Five Star wants more profit and changes its profit objective to $300.00 a week. Work out the full cost of one foil job and the price, by cost-plus.
Only the profit objective changed, so only the mark-up and the price changed: the mark-up from $20.00 to $25.00, and the price from $190.00 to $195.00.
b.Use the price of $195.00 in two models. What profit does the projected income statement for 12 foil jobs show, and what is the break-even point?
If Five Star does 12 foil jobs at $195.00, the profit for the week is the profit objective. The break-even point is the number of foil jobs Five Star needs to cover the total costs at $195.00.
c.Write up how the price of $195.00 was set, with the figures from tasks a and b. Give the cost-plus working first, then the two models.
“Five Star set the price of a full head of foils by cost-plus. In a projected week of 12 foil jobs, the total costs are $2,040.00, so the full cost of one foil job is $170.00. Five Star's profit objective is $300.00 a week, which is $25.00 a job, so the price is $195.00. The projected income statement shows a profit of $300.00 for the week. The break-even point rounds up to 11 foil jobs a week, 1 fewer than the 12 foil jobs Five Star expects.”
The write-up gives the full cost, the profit on one foil job and the price, then the profit for the week and the break-even point, each the same figure as in tasks a and b.
d.A friend says: “Charge $199.00. Prices ending in 99 sell better.” Explain why the friend's reason alone is not enough to set Five Star's price.
“The friend's reason is psychological pricing. Psychological pricing starts from a price already chosen and does not show that $199.00 covers Five Star's costs and leaves a profit. Five Star should set the price by cost-plus first, from the full cost of $170.00 a foil job, and then use the price in a projected income statement and a break-even analysis. A survey of clients can then support the price.”
The answer names the strategy, says what the strategy cannot show, and says what to do instead.
Go Sierra, go!
You worked out the price of a full head of foils by cost-plus, from the full cost of a foil job and Five Star's profit objective, and used the price in a projected income statement and a break-even analysis. Next, the colour costs Five Star more, and you work out what Five Star could do about the price.