When creating a marketing plan, one of the important parts to know is the financial analysis. This includes knowing the pricing and break-even analysis. This helps marketers make important decisions and assess the outcomes of those decisions.
The first step in financial analysis is pricing the product. The marketer can figure this though evaluating the fixed and variable costs. A fixed cost is a cost that does not vary depending on production level while variable costs are the cost per unit, so they vary directly with production. The marketer can use these to find the cost per unit by determining how many units they are expecting to sell and using this formula:
Unit cost = variable cost + fixed costs/unit sales
This is also the break-even price, the price where total revenue equals total cost, so profit is zero. I used this in my Marketing Plan Assignment for the iPhone K by determining fixed costs as $160,550,000, variable costs as $267 per unit, and expected sales of 57,500,000 units in the first year.
Unit cost = $267 + $160,550,000/ 57,500,000 units = $270
Pricing can be determined from this in two different formulas, markup and return on investment. Both the desire return on sales and ROI are percentages. Markup pricing takes the unit cost and factors in the desired return on sales:
Markup price = unit cost/ (1 – desired return on sales)
Return on investment pricing is cost-based and determines price based on desired rate of return on investment:
ROI price = unit cost + (ROI * investment)/unit sales
My marketing team used a third option for pricing: value-based pricing, offering the right combination of quality and service at a reasonable price. We decided to use this because our product, the iPhone K, was added to an existing Apple line which is known for having great products at higher prices.
The second part to financial analysis is the break-even analysis which is used to determine the unit volume and dollar sales needed to be profitable at a particular price and cost. Break even sales can be determined two ways: fixed and variable costs or contribution margin. These first formulas determine the break-even volume and sales based on fixed and variable costs:
Break-even volume = fixed costs / (price – variable costs)
BE sales = BE volume X price
The second way to calculate break-even sales through contribution margin, the difference between price and variable costs divided by the selling price:
Contribution margin = price – variable cost/price
Break even sales = fixed costs/contribution margin
If a company wanted to calculate the break-even point in order to make a profit, they can use the following formulas:
Unit volume = (fixed cost + profit goal)/(price – variable cost)
Dollar sales = unit volume X price
Each of these steps is important in determining the financial analysis for a marketing plan. By finding how many units need to be sold to reach a goal, a marketer can plan specifically and has a better chance of reaching the company goal.
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