Sunday, 29 March 2015

What is Break-Even-Point?

Break-even point refers to an optimal level of business activities of any firm where cost of production and price match each other. It is a stage where there is no profit or loss in the business. Total revenue matches with total costs.From this point, you can reach towards profit by improving your operations efficiently or, on the other hand, may incur losses due to mismanagement and defective planning.

Definition of Break Even Point
Break-Even-Point can be defined as a point in business scale where the value of total costs equal to total sales or revenue at any point of time. It is a point where expenses equal to income and there is neither profit nor loss in the operations of business. The operations of sales and production of the business break even at this point in a curve or lines joining the costs and revenues.

Importance of Break-even point
  • Break-even point is very helpful in calculating the minimum level of output that is to be crossed to make profits in business. Or, in other words, you can know about the minimum sales that are required to be made to meet out all expenses and make an extra unit of profit.
  • The business man is able to know the minimum number of units required to be produced and sold to level both his fixed costs and variable costs so that with an extra unit sold he can start making profit.
  • So, break-even point calculation can be used by management in setting the prices of products and in determining the minimum sales target to be achieved by them.
  • Further, it is very useful in controlling your fixed costs as you are able to know the impact of fixed costs on your performance level.
Calculation of Break-even Point
Break-even point is calculate with the assumption that Total Cost= Total Revenue or income.
Now, total cost includes both Total Fixed Cost and Total Variable Cost.

Total Fixed Cost is your fixed expense which more or less remains the same. But Variable Cost is related to number of units produced. So Total Variable Cost depends upon your production and sales quantity. So, let us assume that Variable Cost multiplied by the number of units gives you the Total Variable Cost. If Variable Cost is V and number of units is X, then Total Variable Cost = V*X (Variable cost multiplied by X units).

Let Total Fixed Cost be TFC. and Total Revenue be TR. But TR is Price of product multiplied by number of units produced or sold. So, let TR be equal to P*X (Price multiplied by X units)

Now, Break even point or BEP will be equal to TFC + VX = PX or to change the position,
TFC= PX- VX  = X (P-V)

To deduce the number of units required to be produced or sold, the equation will be
X = TFC divided by P-V

If we give values to above concepts:- Suppose TFC = 1,000,000 and P is 100 and V is 60.

From above formula of X = TFC/ (P-V), so, 1000000 divided by (100- 60) ie. 1000000 divided by 40.

So, the number of units required to produce and sell is 25,000 units. This is the Break-even production or Break-even sales to be achieved in order to realize the full expenses incurred by the business.

Benefits of using Break-Even-Point concept

  • By using this method, you are able to know the production and sales targets to be achieved by your business during any period of business.
  • You can control the costs and production levels according to your available options to achieve maximum benefits and to reap profits.
  • In the above example, if you feel it is difficult to achieve the production of 25,000 units, then you may consider other options like reducing your Total Fixed Cost or reduce the Variable Cost or you may even consider of increasing the selling price of your product to meet the expenses.
  • You can plan your future plans and build budgets and projects with the help of this break-even method of concept.

Limitations to application of Break-Even-Point
There are some limitations in applying this method as it is based on some pre-assumptions.

  • Break-even concept assumes that Fixed Costs are constant. But in actual cases, fixed costs also change when there is large scale increase in production or sales as you require to employ more staff and hire more space for increased activities and many other expenses also increase.
  • This concept again assumes that variable cost is constant during the entire period of application of this concept. If there is any slight variation in the variable cost during the period of application, then also, the entire calculation will become useless and all predictions will go wrong.
  • This method does not take into account the stock of inventory as it assumes that production quantity is equal to sales quantity.
  • It further assumes that in multiple product companies, the mix ratios of production are equal to the mix ratios of sales. It considers that the relative ratios between different products are maintained same as that of sales.

Wednesday, 11 March 2015

Marketing strategy & techniques -Three stages of Marketing Strategy

Need for strategies
As I discussed earlier in another chapter, marketing applies both scientific and artistic approaches towards creating customer base and selling your products. Selling your product requires a great deal of wooing your customers. Gone are the days, when the businessmen used to simply keep their shops open and wait for the customers to come and exchange your goods for their money. There is much competition now and nobody will approach on his own to buy your product unless you attract him with your Marketing Strategy.

So, selling your product requires use of alluring and effective strategies so as to attract buyers and establish your market. Marketing Strategy is aimed at increasing your sales and promotion of your business. It is a package of the plans and techniques employed for establishing and promoting your business. It involves use of many different techniques at different levels of business. Before starting business,you need to find out the tastes of buyers and locate your prospective buyers and the areas for your market. Then, you need to advertise your products and services, give discounts and incentives to create market for your goods and establish your strong hold in your area.

Apply strategy according to your business
Different types of products or different areas of market require different marketing strategies typical of their own markets. So strategies can differ from product to product or from area to area. Agricultural product requires its own typical strategy and electronic product requires its own strategy for marketing. Similarly, more advanced cultures need their own typical strategies whereas rural culture has its own strategy for marketing. So, each strategy applies its own marketing technique to promote its business. But overall, the principles are the same. We need to find out our market and prospective buyers. Then we establish our business choosing the products and areas of operation according to the requirements. Then it involves in retaining the customers with incentives so that they may not shift to other products and sellers.

Three stages of applying Marketing Techniques 
Any type of business involves three stages of your Marketing Strategy for setting up the business and its market. These stages are as follows:
  • Locating business opportunities and areas before starting business through study and research.
  • Promotion of business after setting up your product and market.
  • Retaining the market base and customer confidence through good quality, after sale service and support.
All these three stages of business require employment of appropriate and efficient marketing techniques. Let us study the techniques employed at each of these stages of business.

Techniques employed before establishing business
  1. Conduct research to study the culture and tastes of the area where you want to establish your business. This will let you know what options are available for you to trade in and you can choose one that is most suitable to you. For example, if the people are more cultured and like fashionable dresses, advanced electronic items or continental foods, you can choose one of these items as your business.
  2. Know about the resources available for procuring or producing your goods and about available transportation facilities for conducting your business.
  3. You need to keep knowledge of the local laws and restrictions that are in effect in your business area to protect yourself from any later complications. 

Marketing Techniques to be employed after business commencement
  1. Ensure good quality of your products. Your product should be preferred by customers as a better one in comparison with other sellers. Then only will they come to you.
  2. Pricing to be done reasonably. Fix your product price at a reasonable level which can be a bit lesser than other traders so that customers get attracted by the low price. The difference need not be much. Even a fraction of 1% can attract more customers to your product.  
  3. Ensure continuously ready availability of your products. If customers do not get whatever they want readily available at your store, they will look for other shops and you can lose your customer base.
  4. Promote your business through various methods like distributing pamphlets, erecting posters and banners at different places of your area so that people come to know of your business. You can advertise through TV channels and by placing advertisements in news papers also. Showing a celebrity using your product can be a more effective tool of publicity for your product. Sometimes using sex appeal also works out to great extent. These are all publicity stunts for growing your business.
  5. Make your on-line presence felt by maintaining a website and posting the salient features of your business and all your products there on the website. This will facilitate the prospective buyers to find out the sellers of their products easily.
Marketing Techniques for retaining, evaluating and improving your customer base
  1. Best technique to retain customers or attract more customers is to offer some value added services and discounts to regular customers. Offer some discount, or a coupon or a reward points card to allure and satisfy the regular customers. They get pleased to know that they get points or discount coupons every time they shop with you and they turn around more frequently to enjoy this satisfaction.
  2. Offer free appraisal and usage/maintenance tips on your products. Let the customers know some important features and facts of your product which they do not know. Also instruct them how to use and maintain the product for yielding longer life benefits. This will make them more confident about your products.
  3. Another most important technique to be employed in business is packaging and brand image of your product. A nice package with good design and appealing colours will enhance your product. They get associated with your brand image as an identity for good quality. 
  4. Ask for feed back from customers to know their opinions about your products and services. Thereby you can know about the likes and dislikes of customers, why they are choosing your product instead of others and how you can improve your quality to satisfy them. This will always help you in improving your business and growing your customer base.
  5. One more technique is to interact with customers in a cool manner when they come to you or are on-line. Applying gentle manners and sweet voice enhance your image in their minds and creates a great image of your business and goodwill among customers.
  6. Sometimes adding new items to your business can keep customer base intact and also create new customers.
  7. Finally, be prepared to adopt yourself to the changes in tastes, culture and technology.

What is Marketing? Differences between Selling and Marketing

Marketing is the process of creating market for your products through selling and business promotional activities. It is a kind of creating communication between prospective buyers and sellers/ producers of goods and services.

But selling is very limited in scope. It aims at simply selling the product without caring for the quality assessment and customer care.

Definition of Marketing
Marketing can be defined as the process of communicating the value of a product or service through promotional activities and brand building, thereby creating a customer base for the business.

It is a set of activities employed by a company associated with the buying and selling of goods and services including consumer research, advertising and selling till the point of delivery of goods to the ultimate consumers.

Marketing process employs both scientific and artistic approaches for selling of these products. Scientific approach because it indulges in the study of market conditions and research of customer tastes and product quality. Artistic because it needs to be appealing to the senses of customers. It employs the 4 P's of marketing - Product, Price, Place and Promotion. These 4 P's determine their marketing activities. The ultimate goal of marketing is to reach to the customers with an aim to satisfy their needs and maintain a long term relationship with them.

Why Selling is Different from Marketing?
Now, coming to the discussion of differences between selling and marketing concept, let us look at the salient features of selling activity and marketing activity by comparing them through this below table.

Differences between Selling and Marketing

Narrow minded
Limited in scope
Unlimited scope
Engaged in simple selling activities
Involves customer creation, selling and business promotional activities also
Sole purpose is profit making
Thinks about customer care, social cause and product quality also
Operates in a limited area
Engages in widespread areas
Limited staff engagement with a sole proprietor as owner
Employs huge staff of marketing and sales managers and selling agents and sales staff
Proprietor himself oversees sales
Marketing manager is head for marketing activities
Selling is done simply by sitting in the shop
Marketing involves field study and field work
Customers come on their own needs
Customer base is created by wooing them

The above are some of the major differences between Selling and Marketing activities.
So you are able to distinguish now the differences between selling and marketing concept and thereby understand that selling is a component of the wider field of marketing.