Will it make a profit?

University Degree Business and Administrative studies

W i l l i t M a k e a P r o f i t?

By Najam Zahid 11.2

In this coursework I shall be analysing finance, I will be investigating the cost of launching a product and the possibilities of making a profit. I shall be looking at drinks in this particular coursework, and will be using a product that is named Coca-Fizz. During the launching of this business I will be using the following terms; capital expenditure and revenue expenditure. Capital expenditure is the capital spent on setting up and revenue expenditure is the capital used to run the business. I shall record my Revenue and capital expenditure on tables, which have to be paid to set up and run my business. Revenue expenditure can also be split even further into fixed and variable costs. Fixed costs are those that don’t change, for example rates, and variable costs are those costs that differ. An example of variable costs would be bills as you use different amounts during the year. Later on in this coursework I will produce break-even charts to show how well the business will have to do in order to achieve a profit and to survive.

The main objective of this coursework is to investigate the possibility of making a profit for the chosen Coca-Fizz product. I shall produce break-even charts and analyse them. It will involve working out costs, setting prices, producing spreadsheets and charts. All my work shall be word processed to produce a report that will explore the possibility of making a product.

Likely costs of buying/manufacturing a business for Coca-Fizz(task 2)

During the launching of a business many factors have to be considered in order to make a profitable business. It is necessary to list the costs before opening a business as it displays weather or not a business can be successful and also it saves sloe traders/partnerships from making costly mistakes about tax and rent, as these factors people pay less interest in. The plan below shows the likely costs my business will undergo.

(Table 1: costs for the Coca-Fizz Company)

Table 1 above shows the likely costs my business will undergo once it will established, it also shows that my fixed cost will be £30 000 throughout the year. When any business is established it always experiences fixed and variable costs. An example of a fixed cost for my Coca-Fizz business would be salaries and an example of variable costs would be bills. The reason why salaries are a fixed cost is because the workers have to be paid a fixed amount each year no matter what the output of the business is. The reason why bills are variable is because they are never the same. For example an electricity bill in January costing £50 might be £45 the following month. Variable costs also appear for products, examples of this would be the amount of produce Coca-Fizz makes. In one year Coca-Fizz may produce 700 gallons of coke costing £300. But in the following year Coca-Fizz may produce 900 gallons of coke costing £350. This is mainly because of the consumers’ interest. Companies produce according to the consumers demand. Where the consumers demand versus the companies supply meets is called the equilibrium point. If the demand is low Coca-Cola produce less whereas if the demand is high so is the supply. Table 1 also shows the ‘packaging authority’ I will have to pay under licence with Coca-Cola in order to give a sufficient container for my product.

Pricing methods for a business (task3)

There are several methods of pricing that a business can use. I have listed the main pricing strategies below. The main pricing systems used in the market are:

Competition based pricing, this is when pricing is set according to its competitors, if it is set at a reasonable price or cheaper than its competitors then that product will sell.

There is Cost plus pricing, this is when you charge according to a percentage. For example; if your business aims to sell everything at a profit margin of 100%, a rubber ...

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Pricing methods for a business (task3)

There are several methods of pricing that a business can use. I have listed the main pricing strategies below. The main pricing systems used in the market are:

Competition based pricing, this is when pricing is set according to its competitors, if it is set at a reasonable price or cheaper than its competitors then that product will sell.

There is Cost plus pricing, this is when you charge according to a percentage. For example; if your business aims to sell everything at a profit margin of 100%, a rubber costing you £0.20 would sell at £0.40.

There is also Creaming or skimming, this is when setting a price for a product initially then lowering it later on. It is used, for instance, with hi-tech products. An example of creaming is video players, when they first came out they cost thousands of pounds. They were mainly bought by companies who were willing to pay a high price for the product. However, to create a mass market the manufacturers had to lower the prices so everyone could afford to buy the product.

Market orientated pricing is when setting a price is based upon the analysis of the market. The price is given by the market as they can value it. How the market feels to price the product is utterly depended upon their analysis. For instance, the features a product has.

Another main type of pricing is Penetration Pricing. This is when the initial price of a product starts off low to attract customers. When the product gains market share the price is likely to be raised as the product is trusted.

Price discrimination is when different prices are set (for the same product) in different segments of the market. This is mainly because of the area the shop is located. An example of this is in the USA, consumers are willing to pay a higher price for a bottle of Chanel No5 than East Ham. As a reason for this Chanel will charge more money for the same bottle of perfume in the USA (as this is what their maximum profit can be) than East Ham because consumers in East Ham are willing to pay less.

From all the types of pricing there are available, I have chosen two of the main pricing strategies in order to make my product successful. These two pricing systems are ‘Price discrimination’ and ‘Penetration pricing’. The reason why I chose ‘Price discrimination’ as the first pricing method is because I feel that I can make maximum profit in areas where people are willing to pay more. For example, I could charge more in a theme park or a shopping centre than a high street. With this type of pricing I can price differently throughout the segments of the market making the most of the land I have bought, and therefore discriminating those people who can afford to spend more, making my profits larger. The reason why I chose ‘Penetration pricing’ as my second method of pricing is because it will gains the consumers interest. Starting off at a low price will encourage people to try out the product. When the brand is then trusted I can then higher the price in order to make the business profitable. As the brand will be trusted people will then be willing to pay a higher price for the same product in different segments of the market.

A business might change their pricing strategies over time for their business to remain successful. The main reason why a business might change its pricing strategy is because the type of pricing, such as ‘penetration pricing’, only lasts over a certain period. When the price of the product is no longer low, consumers will no longer wish to buy that product making a decline of sales. To ensure that the product remains successful, a company starting off with ‘Penetration pricing’ may change to ‘Creaming’ to regain sales.

Sales Required (Task 4)

In order to make a profit the amount spent on producing the product must first be covered. Table 2 shows the level of sales required for the first pricing strategy to cover costs.

(Table 2: Level of sales required for method of sales1)

(Table 3: Sales required for method of sales 2)

Table 2 shows the levels of sales that are required to cover costs for the first pricing strategy I have chosen. It shows that in order to achieve a profit I must sell at least 10000 products. Table 3 shows the levels of sales that are required to cover costs for my second pricing strategy. It shows that I must sell at least 5000 to make a sufficient profit. From the data I have collected as it stands the second pricing strategy will make the profits increase for the Coca-fizz business

W i l l i t M a k e a P r o f i t?

The Break-Even (Task 5)

(Table 4: Penetration pricing)

The Analysis (Task7)

From the break-even equation, charts and spreadsheets I have created for penetration pricing (£0.30), I can see on figure 1 that I will have to sell just over 210 000 bottles of produce in a year in order to cover my annual costs for running the business. From the total products I need to sell in a year I can calculate the amount of products I will have to sell in a day by dividing the total by 52, which comes to 4048 bottles a day. I believe this to be a reasonable target because of the advertising my business would have injected into the market. As drinks are competitively priced I do not believe that my company will loose many sales to rivals which would have delayed any chance for my company to make a profit.

Form figure 2 for the price discrimination method (£1.00), I will have to sell just over 40 000 of drinks a year to make my business to break-even, and in which would be 769 products a day. I believe that the discrimination method would be a more realistic method of sales. Even the variation of pricing wouldn’t make a difference to the company as a whole. The only problem I can foresee, for reaching the target, is the actual selling price of the product. Priced at £1.00 is extremely expensive for those can’t afford high prices. This could impact the sales as I may not sell as many due to the high prices. But selling the product in certain segments of the market would generate profits for my business, despite the high prices.

For both types of pricing strategies I expect both to make profits. As I expect profits I will have to sell much more than the break-even. On the whole I predict my business will sell (on average) over 10 000 products a day. This should give me a profit of £126000-£130000 in penetration pricing and £490000-£520000 in price discrimination a year. I also believe that these profits are excellent and also believe that they can be attained.

If I had to reduce price due to competition, for the first pricing method I think that it would be like ‘throwing the business down the gutter’. I am not also sure that reducing my price would make higher guaranteed sales, if consumers are not to keen on buying the product, even if the prices are low, this could mean losses and even bankruptcy.

If Things Changed (Analysis Continued)

(Table 5: If There Was Competition)

Table 5 shows how my company would look if it had to reduce prices because of competition form other competitors, such as Coca-Cola or Dr Pepper. It also shows that I will have to sell 600000 products to break-even. What this means is that the Coca-Fizz company may not produce the sales they need. The consumers may turn to other ‘giant’ companies as they have gained trust from the companies. If the price is not low enough for the Coca-Fizz product I may not sell as many products to the consumers as intended. To generate enough profit I must sell more than the break-even to invest back in the company. I could buy more machinery to make a new product, for example.

If costs were to rise I believe that I could charge at a higher price but then could be crippled by the rival competitors, Coca-Cola. For the second pricing strategy I don’t think thing could be as drastic as the first pricing method. If I were to reduce prices in the second pricing method I wouldn’t suffer any huge losses, but I believe that the losses would be covered. The lower price could also help sales and may even increase them if were kept at a reasonable discrimination price. If costs were to rise I still believe that my business won’t suffer any huge losses. As the price is already high in the market, I will not have to increase the price to cover the costs. All I will have to do is sell an extra 1000 products to cover the small losses.

(Table 6: If Costs Increased)

Table 6 shows how my business would stand if the prices increased in my first pricing method. It shows that I will have to sell less than half a million to break-even. That is 1373 products a day. To make a profit would be even harder. I think that this is an impossible target and that my business will have already failed before it will had reached anywhere near the break-even.

Conclusion (Task 8)

From all the work done in this coursework, I have worked out many factors in regard of my Coca-Fizz business. This includes the changes I will have to make in order to make my business successful; will the business be profitable in the market of today realistically? And that will it stand any chance with its competitors, for example Coca-Cola? I have learnt that planning a business is vital in order to make it successful. One reason why it is necessary produce a break–even is to know how much you have to sell in order to make a profit, and just not hoping that the business will make a profit in the first place.

I believe that my business will fail. This is because selling 1428 products a day is out of reach as many consumers have opted for the trusted Coca-Cola Company. Even if I sell more than Coca-Cola, which is highly unlikely, I will have to pay for the packaging authority, which is owned by Coca-Cola. What this shows is that if my business is successful, Coca-Cola will have a proportion of my sales, thus still being more successful than the Coca-Fizz company. The packaging authority is included in my fixed costs.

If I was to change the price of the product or to lower it than it actually is, then I may have an increase in sales, and therefore the costs would be higher than predicted. But realistically I do not have the sufficient capital to inject into the business. Injecting money and taking out loans to increase my temporary assets may create a surplus if my product doesn’t sell. Therefore I cannot afford to take the chances to send my company into liquidation.

If I were to make changes to the product I may change the packaging to make the selling price of the product cheaper. This can only be done when the product has gained market trust. (An example of this would be coca cola with their glass bottles and then turning to plastic). I cannot afford to make the packaging of the drink cheaper as the consumer may not be attracted enough into buying the product.

The main competition I have is the Coca-Cola business. They produce quality drinks and have the markets trust. Market trust is the main factor in a business as if a company is trusted then a consumer will then purchase again from that company. To do this I may have to create advertisements which are ‘glued’ to the consumers mind. The main factor is taste; if the taste is horrible then the consumer will loose the trust within company and opt for another. The second is packaging. In this assignment I have noticed many weaknesses.

One main weakness that I have come around is the idea to choose the right pricing strategies, and I don’t know actually if these pricing strategies will have any impact in making a profit for my business. If I were to redo my assignment I would make my calculations more realistic, for example the fixed cost.

Najam Zahid 11.2

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