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Finance and Financial Planning
Stuart Hartley
Financials
Pricing
Sales Forecast
Profit and Loss
Cashflow Forecast
Price is a key marketing tool
− It is the odd one out in the marketing mix
− It’s a revenue earner rather than a cost
− Setting prices is therefore an essential skill
−Too higher price might lead to lost sales
−Too lower price losing margin
− Price however should not be set in isolation
− It should be set with other aspects of the marketing mix to achieve overall superior
customer value.
Cost and value
− Knowing the difference between cost and value is important
−The cost of your product or service is the amount you spend to produce or deliver
it
−The price is your financial reward for providing the product or service
−The value is what your customers believe the product or service is worth.
Creating value
Price and quality relationship
• Price often sends quality cues to customers
High
High
Low
Low Price
Quality
Perception map
How have you or how
could you set the
prices for your
products / services?
Pricing Checklist
Know your real costs
for each product /
service
Work out the
minimum at which its
worth selling at all
Find out from your
customers what each
product or service is
worth to them
Check your
competitors prices
If their price is lower
than your worth
selling at price
THINK AGAIN
Be prepared to make
range and pricing
changes
Keep checking that
you price is right
Pricing methods
Pricing
methods
Cost
MarketingCompetition
• Cost Orientated Pricing
− Full cost pricing
−A way of including all the costs that are directly and
indirectly associated with the product or service
−Increase cost with decreasing sales!
−Sales are estimated before a price is set
−Focuses on internal costs rather than customers and
customer value
−It does however give an indication to the minimum cost to
make a profit
Year 1
Direct costs £2
Fixed costs £200,000
Expected Sales 100,000
Cost per unit
Direct costs £2
Fixed costs £2
Full costs £4
Mark Up 10%
Price plus profit £4.40
What are your direct costs?
Labour?
Materials?
Sub-contract costs?
Direct Costs
(Per item) Cost of materials
Direct wages
Subcontract charges
Packaging and
carriage
Total Direct Costs
What are your fixed costs?
Rent?
Salaries?
Marketing?
Overheads
(for 12 months) Staff Salaries / wages
Business Rent 0.00
Business Rates 0.00
Water Rates 0.00
Light / Heat / Power 0.00
Repairs and Renewals 0.00
Business Insurance 0.00
Travel and Vehicle
costs 0.00
Phone and Postage 0.00
Printing and
Stationery 0.00
Marketing 0.00
Professional Fees 0.00
General Expenditure 0.00
Total Overheads 0.00
Year 1
Direct costs £2
Fixed costs £200,000
Expected Sales 100,000
Cost per unit
Direct costs £2
Fixed costs £2
Full costs £4
Mark Up 10%
Price plus profit £4.40
Year 1
Direct costs £2
Fixed costs £200,000
Expected Sales 100,000
Cost per unit
Direct costs £2
Fixed costs £2
Full costs £4
Mark Up 10%
Price plus profit £4.40
Sales forecasting next
Sales forecasting
• Your sales forecast should be based upon any historical sales, your marketing
strategic and your market research.
• It is a month-by-month prediction of the level of sales you expect to achieve.
• Every year is different, so you need to consider any changing circumstances that
could significantly affect your sales
• These factors - known as the sales forecast assumptions - form the basis of your
forecast.
• You may wish to do two
1. A best guess – what you really expect
2. A worst case – your lowest estimate no matter what
Typical examples of assumptions:
− The market you sell into will grow by 2 per cent.
− Your market share will shrink by 2 per cent, due to the success of a competitor.
− Seasonality – how sales will change depending on the time of year
− You will spend 50 per cent less on advertising, which will reduce the number of
enquiries from potential customers.
− You are launching a range of new products. Sales will be small this year and costs will
outweigh profits, but in future years you will reap the benefits.
− You have new products that have the potential to increase sales rapidly.
How to forecast sales
• Use your previous experience
− If you don’t have personal experience seek those you might have, friends, past colleagues,
advisors
• Use past results as a guide
− If not your own look for past results from other similar companies
• Look for specific drivers
− E.g. if you are delivering services how many days can you actually earn fees, ensure you
account for non fee earning days Use market data
− If you are a restaurant think about how many tables you have and how often you can turn
them
• Use market data
Market size
• Total available market
• This is the entire universe that could ever buy
your product, for your niche – anywhere
Addressable market
This is revenue represented by the market
segments that you intend to sell and service in
the time covered by your plan available money
Market size
A B C
Market
Size
Number of
customers
Average
transaction size
Number of
transactions per
customer per
year
Sales Forecast
MONTH SALES a SALES
b
SALES
c
TOTAL
MONTH
MONTH CUMULATIVE
MONTHLY
1
2
3
4
5
6
7
8
9
10
11
12
YEAR
Can you forecast your sales?
You should now have enough
information to complete your
Profit and Loss forecast
Annual
Sales Income
Sales a £0.00
Sales b £0.00
Sales c £0.00
Sales d
Total Sales Income £0.00
Direct Costs
Cost of materials £0.00
Direct wages
Subcontract charges
Packaging and carriage
Total Direct Costs £0.00
Gross Profit £0.00
% GP Margin
Overheads
Staff Salaries / wages
Business Rent 0.00
Business Rates 0.00
Water Rates 0.00
Light / Heat / Power 0.00
Repairs and Renewals 0.00
Business Insurance 0.00
Travel and Vehicle costs 0.00
Phone and Postage 0.00
Printing and Stationery 0.00
Marketing 0.00
Professional Fees 0.00
General Expenditure 0.00
Total Overheads 0.00
Net Profit / Loss £0.00
Profit and loss
Now that we have our costs and
our sales – what are your costs per
unit?
Back to pricing
Year 1
Direct costs £2
Fixed costs £200,000
Expected Sales 100,000
Cost per unit
Direct costs £2
Fixed costs £2
Full costs £4
Mark Up 10%
Price plus profit £4.40
You now have a cost orientated
price
Pricing Checklist
Know your real costs
for each product /
service
Work out the
minimum at which its
worth selling at all
Find out from your
customers what each
product or service is
worth to them
Check your
competitors prices
If their price is lower
than your worth
selling at price
THINK AGAIN
Be prepared to make
range and pricing
changes
Keep checking that
you price is right
Pricing Checklist
Know your real costs
for each product /
service
Work out the
minimum at which its
worth selling at all
Find out from your
customers what each
product or service is
worth to them
Check your
competitors prices
If their price is lower
than your worth
selling at price
THINK AGAIN
Be prepared to make
range and pricing
changes
Keep checking that
you price is right
Competitor orientated pricing
• Competition
− At the very least you should know who your competitors are and what they charge
Immediate competitors,
e.g. Blockbusters
Technically similar products
Secondary competitors, eg.
Lovefilm / Netflix
Different products solving
the same problem in a
different way
Tertiary competitors e.g. Sky
Movies
Different products solving or
eliminating the problem in a
different way
How to find out your competitors prices
• Simple google search
• Government contracts
• Competitor websites
• Primary research
−Secret customer
−Student project
Can you accurately create a
competitor based price for your
new product / service?
What’s the difference?
Is it feasible?
Pros and cons of competitor pricing
•Pros
− Its fairly simple – in a B2C case
− Its low risk
− It can be accurate
•Cons
− Missed opportunities
− Following not leading
− Not long term
Pricing new products or services
High
High
Low
Low
Promotion
Price
Rapid Skimming
Rapid
Penetration
Slow Skimming
Slow
Penetration
Premium products
Gradual entry
Premium products
Quick entry
What has your organisation used
in the past?
What will you use now?
Cashflow
−Cashflow forecasting enables you to predict peaks and troughs in your cash
balance.
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11Month 12
Income
Sales a
Sales b
Total Income £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Expenditure
Materials
Subcontract Charges
Packaging and Carriage
Wages
Business Rent
Business Rates
Water Rates
Light / Heat / Power
Repairs and Renewals
Business Insurance
Travel and Vehicle costs
Printing and Stationery
Marketing
Professional Fees
General Expenditure
Total Expenditure £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Monthly net inflow / outflow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Cumulative monthly flow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Pricing tip
Complicated price points and conditional
discounts lead to consumer confusion, anger
and loss of business.
If a prospect cannot understand your pricing
they will likely walk away.
Be simple and clear
High Price versus Low Price
High Price Segments Low Price Segments
Product provides high value Only feasible alternative to charge low –
customers are not cash, no differentiation
Customers have high ability to pay Requirement to achieve market presence or
domination
Consumer and bill payer are different Can afford to make money later
Lack of competition Can make money elsewhere
High pressure to buy There are barriers to market entry
Negotiating margins
− In some instances customers expect a price reduction
− Price paid is therefore very different from list price
− The difference can be accounted for by
−Order size
−Competitive discount
−Fast payment discount
−Promotional allowances
− Many organisations therefore build in a negotiating margin
• Technology allows for
• Dynamic pricing
• Easier and closely monitored promotional pricing campaigns
• Orange Wednesday, Pizza Express
• Loyalty cards / loyalty bonus
• Contactless payments / mobile payments
• Non technology based
• For example
• Promotional pricing
• Boots 3 for 2, Waterstones
• Psychological pricing
• Referral bonuses
• Subscriptions
Innovation in pricing
No matter what pricing tactic you use you
are establishing your basis of value to the
customer and your competitors.
The customer has to see the relative
value of the product or service and the
price needs to match that relative value.
You therefore need to make sure you are
not charging too much or indeed not
charging too little
Financials
Pricing
Sales Forecast
Profit and Loss
Cashflow Forecast
✓
✓
✓
✓
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Finance and pricing - DMU

  • 1. Finance and Financial Planning Stuart Hartley
  • 3. Price is a key marketing tool − It is the odd one out in the marketing mix − It’s a revenue earner rather than a cost − Setting prices is therefore an essential skill −Too higher price might lead to lost sales −Too lower price losing margin − Price however should not be set in isolation − It should be set with other aspects of the marketing mix to achieve overall superior customer value.
  • 4. Cost and value − Knowing the difference between cost and value is important −The cost of your product or service is the amount you spend to produce or deliver it −The price is your financial reward for providing the product or service −The value is what your customers believe the product or service is worth.
  • 6. Price and quality relationship • Price often sends quality cues to customers High High Low Low Price Quality
  • 8. How have you or how could you set the prices for your products / services?
  • 9. Pricing Checklist Know your real costs for each product / service Work out the minimum at which its worth selling at all Find out from your customers what each product or service is worth to them Check your competitors prices If their price is lower than your worth selling at price THINK AGAIN Be prepared to make range and pricing changes Keep checking that you price is right
  • 11. • Cost Orientated Pricing − Full cost pricing −A way of including all the costs that are directly and indirectly associated with the product or service −Increase cost with decreasing sales! −Sales are estimated before a price is set −Focuses on internal costs rather than customers and customer value −It does however give an indication to the minimum cost to make a profit
  • 12. Year 1 Direct costs £2 Fixed costs £200,000 Expected Sales 100,000 Cost per unit Direct costs £2 Fixed costs £2 Full costs £4 Mark Up 10% Price plus profit £4.40
  • 13. What are your direct costs? Labour? Materials? Sub-contract costs?
  • 14. Direct Costs (Per item) Cost of materials Direct wages Subcontract charges Packaging and carriage Total Direct Costs
  • 15. What are your fixed costs? Rent? Salaries? Marketing?
  • 16. Overheads (for 12 months) Staff Salaries / wages Business Rent 0.00 Business Rates 0.00 Water Rates 0.00 Light / Heat / Power 0.00 Repairs and Renewals 0.00 Business Insurance 0.00 Travel and Vehicle costs 0.00 Phone and Postage 0.00 Printing and Stationery 0.00 Marketing 0.00 Professional Fees 0.00 General Expenditure 0.00 Total Overheads 0.00
  • 17. Year 1 Direct costs £2 Fixed costs £200,000 Expected Sales 100,000 Cost per unit Direct costs £2 Fixed costs £2 Full costs £4 Mark Up 10% Price plus profit £4.40
  • 18. Year 1 Direct costs £2 Fixed costs £200,000 Expected Sales 100,000 Cost per unit Direct costs £2 Fixed costs £2 Full costs £4 Mark Up 10% Price plus profit £4.40 Sales forecasting next
  • 19. Sales forecasting • Your sales forecast should be based upon any historical sales, your marketing strategic and your market research. • It is a month-by-month prediction of the level of sales you expect to achieve. • Every year is different, so you need to consider any changing circumstances that could significantly affect your sales • These factors - known as the sales forecast assumptions - form the basis of your forecast. • You may wish to do two 1. A best guess – what you really expect 2. A worst case – your lowest estimate no matter what
  • 20. Typical examples of assumptions: − The market you sell into will grow by 2 per cent. − Your market share will shrink by 2 per cent, due to the success of a competitor. − Seasonality – how sales will change depending on the time of year − You will spend 50 per cent less on advertising, which will reduce the number of enquiries from potential customers. − You are launching a range of new products. Sales will be small this year and costs will outweigh profits, but in future years you will reap the benefits. − You have new products that have the potential to increase sales rapidly.
  • 21. How to forecast sales • Use your previous experience − If you don’t have personal experience seek those you might have, friends, past colleagues, advisors • Use past results as a guide − If not your own look for past results from other similar companies • Look for specific drivers − E.g. if you are delivering services how many days can you actually earn fees, ensure you account for non fee earning days Use market data − If you are a restaurant think about how many tables you have and how often you can turn them • Use market data
  • 22. Market size • Total available market • This is the entire universe that could ever buy your product, for your niche – anywhere Addressable market This is revenue represented by the market segments that you intend to sell and service in the time covered by your plan available money
  • 23. Market size A B C Market Size Number of customers Average transaction size Number of transactions per customer per year
  • 24. Sales Forecast MONTH SALES a SALES b SALES c TOTAL MONTH MONTH CUMULATIVE MONTHLY 1 2 3 4 5 6 7 8 9 10 11 12 YEAR
  • 25. Can you forecast your sales?
  • 26. You should now have enough information to complete your Profit and Loss forecast
  • 27. Annual Sales Income Sales a £0.00 Sales b £0.00 Sales c £0.00 Sales d Total Sales Income £0.00 Direct Costs Cost of materials £0.00 Direct wages Subcontract charges Packaging and carriage Total Direct Costs £0.00 Gross Profit £0.00 % GP Margin Overheads Staff Salaries / wages Business Rent 0.00 Business Rates 0.00 Water Rates 0.00 Light / Heat / Power 0.00 Repairs and Renewals 0.00 Business Insurance 0.00 Travel and Vehicle costs 0.00 Phone and Postage 0.00 Printing and Stationery 0.00 Marketing 0.00 Professional Fees 0.00 General Expenditure 0.00 Total Overheads 0.00 Net Profit / Loss £0.00 Profit and loss
  • 28. Now that we have our costs and our sales – what are your costs per unit?
  • 29. Back to pricing Year 1 Direct costs £2 Fixed costs £200,000 Expected Sales 100,000 Cost per unit Direct costs £2 Fixed costs £2 Full costs £4 Mark Up 10% Price plus profit £4.40
  • 30. You now have a cost orientated price
  • 31. Pricing Checklist Know your real costs for each product / service Work out the minimum at which its worth selling at all Find out from your customers what each product or service is worth to them Check your competitors prices If their price is lower than your worth selling at price THINK AGAIN Be prepared to make range and pricing changes Keep checking that you price is right
  • 32. Pricing Checklist Know your real costs for each product / service Work out the minimum at which its worth selling at all Find out from your customers what each product or service is worth to them Check your competitors prices If their price is lower than your worth selling at price THINK AGAIN Be prepared to make range and pricing changes Keep checking that you price is right
  • 33. Competitor orientated pricing • Competition − At the very least you should know who your competitors are and what they charge Immediate competitors, e.g. Blockbusters Technically similar products Secondary competitors, eg. Lovefilm / Netflix Different products solving the same problem in a different way Tertiary competitors e.g. Sky Movies Different products solving or eliminating the problem in a different way
  • 34. How to find out your competitors prices • Simple google search • Government contracts • Competitor websites • Primary research −Secret customer −Student project
  • 35. Can you accurately create a competitor based price for your new product / service?
  • 37. Pros and cons of competitor pricing •Pros − Its fairly simple – in a B2C case − Its low risk − It can be accurate •Cons − Missed opportunities − Following not leading − Not long term
  • 38. Pricing new products or services High High Low Low Promotion Price Rapid Skimming Rapid Penetration Slow Skimming Slow Penetration Premium products Gradual entry Premium products Quick entry
  • 39. What has your organisation used in the past? What will you use now?
  • 40. Cashflow −Cashflow forecasting enables you to predict peaks and troughs in your cash balance.
  • 41. Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11Month 12 Income Sales a Sales b Total Income £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 Expenditure Materials Subcontract Charges Packaging and Carriage Wages Business Rent Business Rates Water Rates Light / Heat / Power Repairs and Renewals Business Insurance Travel and Vehicle costs Printing and Stationery Marketing Professional Fees General Expenditure Total Expenditure £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 Monthly net inflow / outflow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 Cumulative monthly flow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
  • 42. Pricing tip Complicated price points and conditional discounts lead to consumer confusion, anger and loss of business. If a prospect cannot understand your pricing they will likely walk away. Be simple and clear
  • 43. High Price versus Low Price High Price Segments Low Price Segments Product provides high value Only feasible alternative to charge low – customers are not cash, no differentiation Customers have high ability to pay Requirement to achieve market presence or domination Consumer and bill payer are different Can afford to make money later Lack of competition Can make money elsewhere High pressure to buy There are barriers to market entry
  • 44. Negotiating margins − In some instances customers expect a price reduction − Price paid is therefore very different from list price − The difference can be accounted for by −Order size −Competitive discount −Fast payment discount −Promotional allowances − Many organisations therefore build in a negotiating margin
  • 45. • Technology allows for • Dynamic pricing • Easier and closely monitored promotional pricing campaigns • Orange Wednesday, Pizza Express • Loyalty cards / loyalty bonus • Contactless payments / mobile payments • Non technology based • For example • Promotional pricing • Boots 3 for 2, Waterstones • Psychological pricing • Referral bonuses • Subscriptions Innovation in pricing
  • 46. No matter what pricing tactic you use you are establishing your basis of value to the customer and your competitors. The customer has to see the relative value of the product or service and the price needs to match that relative value. You therefore need to make sure you are not charging too much or indeed not charging too little
  • 47. Financials Pricing Sales Forecast Profit and Loss Cashflow Forecast ✓ ✓ ✓ ✓
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