Time Value of Money PDF

BM2217 BUSINESS MODEL Time Value of Money According to Lusk (2022), the time value of money (TVM) is the concept that the money you have in your pocket today is worth more than the same amount if you receive it in the future because of the profit it can ear...

BM2217 BUSINESS MODEL Time Value of Money According to Lusk (2022), the time value of money (TVM) is the concept that the money you have in your pocket today is worth more than the same amount if you receive it in the future because of the profit it can earn during the interim. For example, you can receive P100,000 cash today or P50,000 per year for the next two (2) years, totaling P100,000. Ignoring taxes, the P100,000 cash today is worth more, according to the TVM principle, because you can put your money to work. You can invest in stocks, buy real estate, or put it in a certificate of deposit Understanding the time value of money can help you decide which job has better salary terms, what is a good rate for a loan, or if the investment you’re considering has good growth potential. Figure 1: The 8Ps of Marketing Source: https://distributedigital.co.uk.jpg PV is the present value of money. i is the interest rate or other return that could be earned. t is the number of years to take into consideration. n is the number of compounding periods of interest per year. An example of using TVM: Using the example above, assume you would invest the P100,000 in a stock that pays 20% yearly, compounded monthly. To calculate the value of the money in two (2) years, here is how it works: FV = P100,000 x (1+(0.2/12))(12x2 ) FV = P100,000 x 1.486914618 FV = P148,691.46 It means the P100,000 you get today will be worth P148,691.46 in two (2) years. If you wait two (2) years to receive the P100,000 payment, you will lose out on P48,691.47 interest, which you could have earned then. With investments that have higher returns, such as stocks or real estate, the missed opportunities will be even bigger. While you probably will not use this formula regularly to calculate the future value by hand, it gives you an idea of the opportunity cost of money today versus tomorrow. It can help you make better financial decisions in the future. 08 Handout 1.1 *Property of STI [email protected] Page 1 of 6  BM2217 Revenue Generation The overall process by which businesses find ways to generate income and improve profitability is known as revenue generation (Bank for Canadian Entrepreneurs, n.d). The sales team can learn how to increase the business’s profit and income by implementing a revenue generation process. Additionally, it gives the business a clear view of all revenue streams, making it simple to determine where income comes from and where adjustments can be made to increase it. Utilizing knowledge and context from prior experiences to define a course for the business is essential to creating and implementing a solid revenue plan. The following models are some of the most commonly used revenue generation sources: 1. Personal investment. A person invests and manages financial instruments, such as stocks, bonds, real estate, and others, as a personal investment. Individual investors must create investment plans and frameworks based on their unique characteristics. 2. Love money. It is money given to a spouse, parents, friends, or other loved ones. It is referred to as “patient capital,” which will be repaid as your business’s profits rise. 3. Venture Capital. Investors provide venture capital, a type of private equity and a form of financing, to small and startup businesses that they believe have the potential for long-term growth. Wealthy investors, investment banks, and other financial institutions typically provide venture capital in exchange for shares of stocks. 4. Angels. Angels are typically wealthy individuals or retired executives who make direct investments in privately held small businesses. In addition to their experience and extensive network of contacts, they frequently serve as leaders in their respective fields and contribute technical and managerial expertise. In exchange for putting their money at risk, they reserve the right to oversee the management practices of the business. 5. Crowdfunding. A type of fundraising called “crowdfunding” involves a business asking the general public for money, typically in exchange for equity in the business. Most of the time, it involves a private business requesting many people for small donations. It contrasts the common method of raising capital through venture capitalists or angel investors, in which a small group of actors invest larger sums in the business. 6. Business Incubators. Future businesses and other startups are frequently invited to share incubator spaces and technical, administrative, and logistical resources with other established businesses. An incubator, for instance, might let other businesses use its laboratory so that a new business can develop and test its products for less money before starting production. This support often helps businesses in cutting-edge fields like biotechnology, information technology, multimedia, and industrial technology. 7. Grants and Subsidies. Grants can be used for specific things and do not usually need to be repaid. On the other hand, subsidies are defined as direct contributions, tax breaks, and other special assistance governments provide to businesses to offset operating costs over an extended period. 8. Loans. Loans are the most common form of funding for small and medium-sized businesses. A sum of money is advanced to the borrower by the lender, typically a government agency, financial institution, or corporation. The borrower agrees to a set of conditions in return, including any finance charges, interest, and repayment date. 08 Handout 1.1 *Property of STI [email protected] Page 2 of 6  BM2217 Basic Pricing Strategies and Techniques Price is a crucial factor in influencing consumer choice. Making pricing decisions requires careful consideration of various variables, including the business, market competition, brand positioning, and the target market. Businesses must set a price for the first time when developing a new product, introducing their existing product into a new distribution channel or geographical area, or entering a new contract. The following is the six-step procedure for setting a pricing policy: Step 1: Selecting the Pricing Objective. Identifying the pricing objective is the primary step toward pricing. Value. The word “cheap” can mean two (2) different things. It may indicate a lower cost, but it may also indicate that the product is not high-quality. There is a reason why consumers associate low- quality goods with low prices. The assumption that a product is of higher value is incorporated into its higher price. Convinces customers to buy. A high price may convey value, but it would not matter if it is too much for a potential customer to pay. If businesses charge a low price, the product will appear cheap and be ignored. The ideal price encourages customers to choose the product over those of rivals’ similar offerings. Gives customers faith in the product. The opposite is true if products with higher prices show value and exclusivity. If businesses set their prices too low, it will appear like the product is not well-made. Step 2: Determining Demand. Demand refers to the consumer’s desire to purchase goods and services and willingness to pay a specific price. In economics, prices lead to varying demand levels and impact a business’s marketing objectives. The normally inverse relationship between price and demand is captured in a demand curve (see Figure 2): The higher the price, the lower the demand. For luxury goods, the demand curve sometimes slopes upward. Some consumers take the higher price to signify a better product. However, if the price is too high, demand may fall. Figure 1. Inelastic and Elastic Demand Source: Marketing Management: European Edition, 2019, p. 520 08 Handout 1.1 *Property of STI [email protected] Page 3 of 6  BM2217 Step 3: Estimating Costs. The demand for a product sets a ceiling (limit) on how much the business can charge for its products or services, whereas costs set the floor (base). Most businesses want to set a price that covers the costs of producing, distributing, and selling the product, including a fair return for its effort and risk. Types of Costs and Levels of Production: Fixed costs, or overhead costs, do not vary with production level or sales revenue. A business must pay monthly bills for rent, heat, interest, salaries, and so on, regardless of output. Variable costs vary directly with the level of production. For example, each tablet computer produced by Samsung incurs the cost of plastic and glass, microprocessor chips and other electronics, and packaging. These costs are constant per unit produced and are called variable costs because the total varies with the number of units produced. Total costs are the sum of the fixed and variable costs for any given production level. The average cost is the cost per unit at that production level; it equals total costs divided by production. Management wants to charge a price that will at least cover the total production costs at a given production level. Step 4: Analyzing competitors’ costs, prices, and offers. When pricing a product, a technopreneur must consider the prices of its competitors and the possible reactions these prices might generate from consumers. If the business’ products or service includes features not offered by the competitor, it should evaluate its value to the customer and add that value to the competitor’s price. If the competitor’s offer contains features not offered by the business, it should subtract its value from its price. Step 5: Selecting a pricing method. Taking into consideration the customers’ demand, cost function, and competitors’ prices, the business is now ready to select a price using the following pricing method: A. Markup pricing: The basic pricing method is to add a standard markup to the product’s cost. 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 + 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒 = (1 − 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑠𝑎𝑙𝑒𝑠) B. Target-return pricing: The business determines the price that yields its target rate of return on investment. 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 × 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑎𝑟𝑔𝑒𝑡 − 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝𝑟𝑖𝑐𝑒 = 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 + 𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 = 𝑝𝑟𝑖𝑐𝑒 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 C. Perceived-value pricing: Businesses increasingly base their prices on the customer’s perceived value. The perceived value of a product is based on various factors, such as the buyer’s image of the product’s performance, the channel deliverables, warranty quality, customer support, and other softer attributes. D. Value pricing: Value pricing significantly impacts how a business sets prices. Businesses that charge a fair price for high-quality goods retain customers by providing a good product value. Value pricing is not just about setting lower prices; it is about redesigning the business’s operations to become a low-cost producer while still meeting customer expectations for quality. 08 Handout 1.1 *Property of STI [email protected] Page 4 of 6  BM2217 E. Everyday Low Pricing (EDLP): Constant prices or EDLP eliminate week-to-week price uncertainty and the high-low pricing of competitors’ promotions. In high-low pricing, the retailer charges higher prices daily but runs frequent promotions with prices temporarily lower than the EDLP level. F. Going-rate pricing: In going-rate pricing, small-to-medium businesses base its price largely on competitors’ prices rather than when their own demand or costs change. Some may charge a small premium or discount but still preserve the difference. G. Market-Skimming Pricing. Many businesses that invent new products set high initial prices to skim revenues layer-by-layer from the market. Market skimming makes sense when the product’s quality and image support its higher price; enough buyers must want it at that price. H. Market-Penetration Pricing. Businesses set a low initial price to penetrate the market quickly, attract many buyers quickly, and win a large market share. Production and distribution costs must decrease as sales volume increases, and penetration pricing maintains its low-price position. Otherwise, the price advantage may be only temporary. I. Product Line Pricing. It is used when a business has multiple products in a product line. Businesses adopt this process to separate similar products into various price groups to create different quality levels in the customers’ minds. Samsung offers Smartphone series with different features at different prices. J. Optional-Product Pricing. Also known as Razor-and-Blade pricing is used when businesses sell main products for a lower price than they ordinarily would and rely on the sales of optional products to make up for the difference. Printers are cheaper to buy than it is to buy ink. K. Product Bundle Pricing. It is used when businesses often combine two (2) or more products as a package for a reduced price than what the items would cost if sold separately. Common bundle samples are fast food restaurants’ value meal combos. L. International Pricing. A business’s price in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and the nature of the wholesaling and retailing system. M. Promotional Pricing. With promotional pricing, businesses will reduce the price of their products drastically for a short period to create buying excitement and urgency. Promotional pricing takes several forms, such as: Special-event pricing. It involves price reduction of products according to special events or certain seasons to draw more customers and gain revenue. Limited-time offer pricing. It involves promotional deals such as online flash sales, free shipping, and discount codes that create buying urgency, making buyers feel lucky to have gotten in on the deal. Rebates. This promotional deal offers a cash-back incentive based on the portion of interest or dividends by the buyer. Businesses employ this strategy to increase the volume of purchases made by customers. Step 6: Selecting the final price. Pricing methods narrow the range from which the business must select its final price. In choosing the price, the business must consider additional factors, including the impact of other marketing activities, business pricing policies, gain-and-risk-sharing pricing, and price impact on other parties. 08 Handout 1.1 *Property of STI [email protected] Page 5 of 6  BM2217 References Bdc (n.d) 8 sources of startup financing https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/start- up-financing-sources Coleman, B. (2022) How to Build a Market Development Strategy https://blog.hubspot.com/marketing/market- development-strategy Hayes (2022) Public Relations (PR) Meaning, Types, and Practical Examples https://www.investopedia.com/terms/p/public-relations-pr.asp Hill, A. (2022) Your Simple Guide to the 8 Ps of Marketing https://distributedigital.co.uk/8ps-of-digital-marketing/ Indeed (2021) Marketing’s Promotional Mix: Definition and How To Use It https://www.indeed.com/career- advice/career-development/marketing-promotional-mix Kotler, P., Keller, K. L, Ang S.W., Tan C.T., Leong S.W. (2018). Marketing Management 7th Edition: An Asian Perspective. Pearson Education Limited. Kotler, P., Keller, K.L., Brady M., Goodman, M., Hansen T. (2019). Marketing Management 4th European Edition. Pearson Education Limited. Kelwig (2022) Sales promotion: Definition, examples, ideas, and types https://www.zendesk.com/blog/sales- promotion/ Lusk, Veneta (2022) Time value of money: The guiding principle for virtually every financial and investing decision https://www.businessinsider.com/personal-finance/time-value-of-money Shopify (2022) What Is Advertising? Definition and Guide https://www.shopify.com/blog/what-is-advertising The Economic Times (2023) What is ‘Marketing Mix’ https://economictimes.indiatimes.com/definition/marketing-mix Zimmermann, S. (2022) Time Value of Money (TVM) https://www.annuity.org/personal-finance/investing/time-value- of-money/ 08 Handout 1.1 *Property of STI [email protected] Page 6 of 6