Chapter 14 Notes v2.docx

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University of Fraser Valley
Business Administration
BUS 100
Kim Milnes

Chapter 14 – Pricing and Distributing Goods and Services Pricing Objectives and Tools 1) Pricing = deciding what the company will receive in exchange for its product 2) Pricing to Meet Business Objectives a) Pricing objectives = goals that the sellers hope to attain in pricing products for sale b) Profit-Maximizing Objectives  Must balance demand to maximize profit  Often take market information and use that as base (ex. Senators up $$ for games vs. Leafs)  Weight production costs and capital expenses/marketing against sales receipts c) Market-Share Objectives  Market share = company’s percentage of the total market sales for specific product  Will set lower initial prices and take loss to increase market share 3) Price Setting Tools a) Cost-Orientated Pricing  Considers desire for profit and costs of providing good  Markup % =  In some industries (ex. Movie) this is not relevant…admission is always $10 b) Break-Even Analysis: Cost-Volume-profit Relationships  Cost-orientated pricing covers variable costs (costs that change with the # goods produces/sold)  Also makes some money towards fixed costs (costs unaffected by # sold...i.e. building)  Break-even analysis = assessment of how many units must be sold at given price before company begins to make a profit  Breakeven point = number of units that must be sold at given price before the company covers all of its fixed and variable costs (1) (in unity sold) Pricing Strategies and Tactics 1) Pricing Strategies a) Pricing Existing Products  Can set above, at or below prevailing market price  Those who price above work consumers to believe higher prices = higher quality b) Pricing New products  Price skimming = pricing new product high as possible to earn max. profit on each unit  Penetration pricing = pricing new product very low to sell most units possible and build customer loyalty c) Fixed versus Dynamic Pricing  Dynamic pricing possible due to internet and flow of information  Price can adjust on one-to-one/customer-to-customer basis 2) Pricing Tactics a) Those with multiple products use price lining (offering all items in certain categories at a limited number of price points)  Ex. price points for suits in a store are $175, $250 and $400 (all set at one of these) b) Psychological pricing = practice of setting prices to take advantage of the illogical reactions of consumers to certain types of prices  Odd-even pricing = one of psych. pricing in which products not sold ad even dollar amounts (ex. $99.95) c) Discount = any price reduction offered by seller to persuade customer to purchase product  Seasonal to increase sales in off periods  Trade for companies in product’s distribution channel  Quantity for those purchasing in bulk The Distribution Mix 1) Distribution mix = combination of distribution channels a firm selects to get a product to end-users 2) Intermediaries and Distribution Channels a) Intermediaries = any individual/firm other than produce that participate in distribution b) Wholesalers = sell products to other businesses, who then sell to other users c) Retailers = sell products to end-users d) Distribution of Goods and Services  Distribution channel = path a product follows from producer to end-user (1) Direct distribution = product travels directly from producer to end user (2) Retail distribution = distribute products through retailers (3) Wholesale Distribution = store products and move (sell) as space opens at retailers (4) Through Agents or Brokers  Sales agent = independent business person who represents firm and receives commission, but never takes legal possession of product  Broker = independent intermediary who matches sellers and buyers as needed  Pros/Cons o
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