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Very good.

Now that you have learned the pricing basics and fundamentals for

how to go about thinking about pricing and the steps to follow for

setting up prices for your product or services, let's go back to our Dodot

case in Iberia in 2008 and think about what are the contribution margins and

the profitability and the economics for the channel and for Dodot itself, okay?

First of all, we would start with the two products that presently exist at the time

of the case in the market, which is the super premium product activity and

the Etapas product, which is its flagship product.

We know from the case that the price, all these prices,

are in cents over here to the market and are sold or

retailed at 31 cents for the super premium and 26 cents for the premium.

The case doesn't state, but obviously there is a value added tax,

which is relatively low for the case of diapers, which is 8%.

So to actually come up with the actual retail price that

the retailer sells for, we need to take away that 8%.

In this particular case, if you remove 8% from the activity,

you are removing 2.5 cents and 2 cents for the Etapas, approximately, okay?

So that means that the price that the retailer gets from the sale of each one of

these items is 28.5 cents and 24 cents.

Now, we need to also estimate what are the gross margin for

the retailers before we can actually see what is the unit contribution or

the gross margin for the company itself.

But before we do that, let's go with two important concepts as to how

people usually, typically measure contribution or

margins of earnings for a particular sale of products or services.

First, we will deal with what's called markup pricing.

Markup pricing simply consists of multiplying by a percentage of

the cost of the goods acquired.

So if the cost of the good is one, meaning you have acquired the product for

one, and the markup price is 15%, that means that you would

multiply by 1.15 to estimate what is the final selling price.

That's called the price at which the retailer sells the product, right?

You have sold it for one to them, the manufacturer, and he sells it for 1.15,

he has a markup price of 15%.

The other common way is the gross margin.

The gross margin is simply the ratio between the difference between the selling

price and the cost of goods over the selling price.

Now, with these two concepts in mind, we can go back to completing the channel

economics and the diaper economics for the retailers and for Dodot.

We knew before that for activity, the price for the retailer is 28.5 cents.

The case also states that in the case of Dodot,

the retailer applies a 15% markup, which means that the cost of the goods sold,

which is the price at which the manufacturers sell the product,

must be 24.8 cents in the case of the super premium product and

20.9 in the case of the Etapas, the flagship product.

We also know from the case that Dodot has 45% contribution

margin per unit on each one of the diapers that it sells.

So with that reference point in mind, we can trace back and go back all the way to

the variable cost of actually producing those diapers, and I leave those

calculations up to you, but you have the answers in front of you over there.

Now, with that, it's very simple.

You take the 45% gross margin, which is 11% in the case of activity and

9.4 cents in the case of Etapas, and you can work out what the variable

cost of producing each one of the units must be approximately, okay?

I'll leave up to you to estimate these numbers and also to work out the same

economics both for the channel and for Dodot for the new possible product.

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13.- Pricing Fundamentals, Part 5

Marketing: Customer Needs and Wants

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