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Franchise Pricing Strategy

Paper Type: Free Assignment Study Level: University / Undergraduate
Wordcount: 3459 words Published: 12th Oct 2020

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Pinot’s Palette is one of the best franchises for those looking for a rewarding experience and financial independence. Pinot Palette opened up their first international location in Toronto, Canada in 2016. It is the consensus of the owners to now expand into other international countries. Pinot’s Palette first studio in Italy will be located in Rome, Italy within a 10-mile radius of their competitor, Vineyarts, one of Europe’s premier Art & Wine Studios.

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It is common for local, municipal, and country regulations to vary on the licenses and permits that will be needed to operate a Pinot’s Palette Studio. It is important to pay these fees to governmental authorities before starting business. Starting up an Italian business can be very attractive to business owners for many reasons such as friendlier tax rates and access to overseas customers. The most popular and common Italian corporation for a small to medium size business is the “SrL” which is a limited liability corporation that has virtually no restrictions on foreign shareholders.

The initial franchise fee is $27,500 for a or a Two Room Studio. There is an artist training fee ($500 per day) which varies plus its actual costs of lodging, food, and travel arrangements for an artist trainer who will conduct on-site initial artist training to all artists hired to perform classes. Pinot Palette requires payment for a Royalty Fee (6% of Sales) and a Marketing Obligation fee (2% of Sales). In addition, the franchise must spend an additional $1,500 per month on local advertising.

The funding will be used to finance the start-up costs associated with a new Pinot’s Palette franchise. The costs are dependent upon local conditions, but the basic costs are outlined in Table 1.

Table 1: Start-up Budget

Pinot’s Palette

   

Sources of Capital

 

 
     

Owners' Investment (name and percent ownership)

 

 


Owner 1 (20%)

 

$100,500

Owner 2 (20%)

 

$100,500

Owner 3 (20%)

 

$100,500

Owner 4 (20%)

 

$100,500

Owner 5 (20%)

 

$100,500

Total Investment

 

 $         502,500

     

Bank Loans

 

 

Bank 1 (SBA loan)

 

 $         500,000

Bank 2 (conventional loan)

 

            300,000

Total Bank Loans

 

 $         800,000

     

Startup Expenses

 

 
     

Buildings/Real Estate

 

 

Purchase (land)

 

 $         160,000

Construction (new building)

 

            500,000

Remodeling

 

              80,000

Total Buildings/Real Estate

 

 $         740,000

     

Leasehold Improvements

 

 

Item 1 (outdoor patio)

 

 $           20,000

Item 2 (landscape and parking)

 

              38,000

Total Leasehold Improvements

 

 $           58,000

     

Capital Equipment List

 

 

Furniture

 

 $           35,400

Equipment

 

              50,000

Fixtures

 

              34,000

Machinery

 

              47,000

Total Capital Equipment

 

 $         166,400

     

Location and Admin Expenses

 

 

Rent & Related Costs

 

 $           10,000

Utility deposits

 

                1,250

Legal and accounting fees

 

                3,500

Prepaid insurance

 

                1,500

Customer Service Center Fee (per year)

 

                2,750

Electronic Mail Fee (per year)

 

                   700

Technology Fee (per year)

 

                1,500

Artisit Training Fee (5 days)

 

                2,500

Franchise Fee

 

              27,500

Total Location and Admin Expenses

 

 $           51,200

     

Opening Inventory

 

 

Category 1 (Wine)

 

 $           15,500

Category 2 (Imported Beer)

 

                8,800

Category 3 (Domestic Beer)

 

                5,100

Category 4 (Liquor)

 

                7,300

Category 5 (Non Alcoholic)

 

                3,600

Total Inventory

 

 $           40,300

     

Advertising and Promotional Expenses

 

 

Advertising

 

 $           30,000

Signage

 

              11,500

Printing

 

                3,500

Total Advertising/Promotional Expenses

 

 $           45,000

     

Summary Statement

 

 
     

Sources of Capital

 

 

Owners' and other investments

 

 $         502,500

Bank loans

 

            800,000

Total Source of Funds

 

 $      1,302,500

     

Startup Expenses

 

 

Buildings/real estate

 

 $         740,000

Leasehold improvements

 

              58,000

Capital equipment

 

            166,400

Location/administration expenses

 

              51,200

Opening inventory

 

              40,300

Advertising/promotional expenses

 

              45,000

Total Startup Expenses

 

 $      1,100,900

Projected Profit and Loss

According to export.gov, “Franchising is widespread throughout Italy and is dramatically growing. With a turnover of approximately $28.5 billion in 2018 (+2% compared to 2017), Italy is the fourth largest market for franchises in Europe, after France, Germany, and Spain. In 2018, the number of Italian franchises reached more than 53,800. In 2018, the Italian market experienced a growth rate of 3.4% in terms of active franchising networks.” ("Italy - Market Overview | export.gov", 2019).

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The franchise fee payments will be completed by Quarter 4 of the first year. Although the first two quarters of operations will not result in a profit, the losses are projected to be less than $4k for the first year. The second year of operations is expected to see a small profit based on the results of Quarter 4 in Year 1. The breakdown of projected revenue and expenses for year 1 is detailed in Table 2:

Table 2: Projected Profit & Loss – Year 1

Projected Profit & Loss – Year 1 

Quarter 1 

Quarter 2 

Quarter 3 

Quarter 4 

Public Painting Revenue 

 $         24,398

 $    26,280

 $    27,970

 $    31,420

Private Party Revenue 

 $           3,400

 $      5,200

 $      6,788

 $      8,230

Bar Revenue 

 $              370

 $         469

 $         490

 $         510

Total Revenue 

 $         28,168

 $    31,949

 $    35,248

 $    40,160

 

       

Rent 

 $         14,000

 $    14,000

 $    14,000

 $    14,000

Payroll 

 $           1,500

 $      1,900

 $      2,180

 $      2,500

Utilities 

 $              560

 $         560

 $         560

 $         560

Marketing 

 $           3,000

 $      3,000

 $      3,000

 $      3,000

Insurance 

 $           3,000

 $      3,000

 $      3,000

 $      3,000

Franchise Fee Payment 

 $           7,000

 $      7,000

 $      7,000

 $      7,000

Other Admin 

 $              450

 $         450

 $         450

 $         450

Marketing Fees 

 $              486

 $         653

 $         782

 $         758

Royalty Fees 

 $           1,263

 $      1,991

 $      2,674

 $      3,400

Total Expenses 

 $         31,259

 $    32,554

 $    33,646

 $    34,668

Total 

 $         (3,091)

 $       (605)

 $      1,602

 $      5,492

**Note: The value of the US Dollar compared to the Euro will very daily**

International Pricing Strategy

When deciding which pricing strategy Pinot Palette should use, it is always important to analyze and consider the economic environmental factors such as inflation, unemployment, disposable income, GDP, and GDP per capita (PPP). Also, internationally there are different taxes and tariffs, and freight charges to consider.  Allie Decker states, “Pricing strategies take into account many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.” (Decker, 2019).

Examples of pricing strategies are cost-based, customer-value based, and competition based. Cost-based is most popular for the customer because the pricing is based on time and materials used to complete the project, however, it can be a disadvantage because your income is directly linked to time. Next is customer-value based pricing in which the pricing is based on the value of your service not necessarily on the time and materials being used. This can be tricky because the price is given upfront, so you have to be sure the pricing will mirror the actual amount of time involved. Lastly, competitive pricing is when the seller uses prices of competing products as a benchmark instead of considering own costs or the customer demand. Abdullahi Muhammed, a contributor for Forbes magazine states, “You want to offer clients the value they deserve but you also want to help your business grow and charge rates that let you fully enjoy doing it.” (Muhammed,2017).

The pricing strategy used for the Pinot Palette in Italy will be competitive pricing. Competitive pricing focuses on the existing market rate for a company’s product or service; using the competitors’ prices (Vineyarts) as a benchmark. The product mix offering will include both private and public paint offerings. The pricing will be based on the time/complexity of the painting, which will result in three standard price points: $45 for an hour session, $55 for two-hour painting session, and $65 for three-hour painting session. In addition to the painting, there will be a bar offering wine, beer, and soda for purchase during the painting session.

Channels of Distribution

The channels of distribution in Italy can differ slightly from those in the United States, but most will be the same. Most logistics companies will offer a range of shipping options for international delivery at various price points to meet customer needs.

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