Tuesday, January 19, 2010

Markup Price, Break-even, or happy number?

A couple days back I was shopping with my younger brother Eddie in Macro. There we were standing, considering if we should buy the big box of ‘Poppers’, Cadbury Dairy Milk’s new product.

There are 24 bars in the box at the price of Rs 225. We were tempted to buy the product as it was quite appealing, however the problem was either of us is a fan of chocolate. So I said, ‘You can buy a box and sell it to your friends at Rs.10 each.’ Without thinking my little brother said, ‘Why Rs10? I can sell it for Rs15.’
Alright if I started to lecture him on the markup pricing concept, this is what I could have said:
Suppose you want to make 20% profit on the sales, then here is the calculation for you.
Unit Cost/ (1-Desired Return on Sales)= 9.375/(1-0.2)=Rs 11.7
Each chocolate bar will now be sold at Rs 11.7

Or I can tell him to be a nice friend to people, ‘Think about how much is your target profit and we can work on the breakeven price’. Suppose Eddie says ‘Ok I want to make Rs200 profit on this’
Break-even Price= (Cost+Target Proft)/ Quantities=(225+200)/24=Rs17.7
Here we have the chocolate bar at Rs 17.7.

All I want to say is that I have heard people commenting on marketing people are not good with numbers. But what I believe is that, maybe people are like Eddie, who doesn’t know the fancy formula to calculate the numbers, yet customers have a ruler in mind to feel what is reasonable.

End of the story is that I simply said ‘Sure why not, Rs 15 sounds good to me!’
Picture taken from:http://eatntravel.pk/2010/01/19/cadbury-dairy-milk-poppers/