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Introduction to Management II - Lecture 007

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Management (MGT)
Chris Bovaird

7 March 2013 CHAPTER 7: PRICING AND DISTRIBUTING GOODS AND SERVICES PRICING OBJECTIVES AND TOOLS Pricing is deciding what the company will receive in exchange for its product. Pricing Objectives are the goals that producers hope to attain in pricing products for sale. It is influenced by the need to survive in the marketplace, social and ethical concerns and corporate image.  Profit Maximizing Objectives o If prices set to low, company will sell many units of its product but miss opportunity to make additional profit on each, may lose money o If prices set too high, company will make a large profit on each item but sell fewer units, resulting in excess inventory and need to reduce production operations, may lose money o Managers weigh receipts against costs for materials and labour to create the product o Consider capital resources (IE: Plant, equipment) o Consider cost of marketing o Pricing forsaleson the internetmustconsiderdifferent kindsofcosts and different forms of consumer awareness than those pricing. Lowering both costs and prices because of unique marketing capabilities. It provides a direct link between producer and consumer so buyers avoid the costs entailed by wholesalers and retailers. Ease of comparison shopping, and point and click is more efficient that driving from store to store  Market Share Objectives o Market Share is a company’s percentage of the total market sales for a specific product. o May outweigh profits as a pricing objective  Other Pricing Objectives o During difficult economic times, loss containment and survival may become a company’s main objective Price Setting Tools is how managers measure the potential impact before deciding on final prices.  CostOrientedPricing considersthefirm’sdesiretomakeaprofitandtakesinto accounttheneed to cover production o Markup Percentage = Markup / Sales Price o Out of every dollar taken in, the markup percentage rate is the gross profit for the store o Does not work for movie theatres although it takes 200 million to make a film  Break Even Analysis: Cost-Volume-Profit Relationships o Variable Costs are the costs that change with the number of goods or services produced or sold o Fixed Costs are the costs unaffectedbythe numberofgoodsor servicesproduced orsold o Breakeven Analysis is the assessment of how many units must be sold at a given price before the company begins to make a profit o Breakeven Point (In Units) = Total Fixed Costs / (Price – Variable Costs) PRICING STRATEGY AND TACTICS Pricing Strategy is pricing as a planning activity that affects the marketing mix. Can managers really identify a single best price for a product? Probably not. Just how important is pricing as an element in the marketing mix? Pricing has a direct and visible impact on revenues, it is extremely important to overall marketing plans.  Pricing Existing Products o Above prevailing market prices for similar products believe higher price means higher quality o Below prevailing price or at prevailing price believe they are low price alternatives, can offer acceptable quality while keeping costs below those of higher priced options o PriceLeadershipiswhenthedominantfirmintheindustryestablishesproductpricesand other companies follow suit (IE: Gasoline)  Pricing New Products o Price Skimming Strategy isthe decisionto pricea newproduct ashigh aspossibleto earn the maximum profit on each unit sold, revenue needed to cover development and introductioncosts,onlyworksifmarketerscanconvinceconsumersthataproductistruly different from those already on the market o Penetration Pricing is the decision to price a new product very low to sell the most units possible and to build customer loyalty Pricing Tactics are ways in which the managers implement a firm’s pricing strategies.  Price Lining is offering all items in certain categories at a limited number of predetermined price points (IE: Men’s suits are $175, $250, $400)  Psychological Pricing is taking advantage of the non-logical reactions of consumers to certain types of prices o Odd-Even Pricing is where prices are not stated in even dollar amounts (IE: Customers regard $1,000 as significant higher than$999.95)  Discountingisapricereductionofferedbythesellertopersuadecustomerstopurchaseaproduct o Cash Discounts is where customers pay cash, rather than buying on credit, pay lower prices o Seasonal Discounts is where lower prices is offered to customers making a purchase at a time of year when sales are traditionally slow o Trade Discount is given to firms involved in a product’s distribution o QuantityDiscountiswhichcustomersbuyinglargeamountsofaproductpaylowerprices International Pricing Pricing products for other countries is complicated because additional factors are involved. Income and spending trends must be analyzed. The number of intermediaries varies from country to country, as does their effect on a product’s cost. Exchange rates change daily, there may be shipping costs, import tariffs must be considered, and different types of pricing agreements may be permitted. Dumping is trying to increase their foreign market share by pricing products below costs, causing the product to be priced lower in a foreign market than in its home market. THE DISTRIBUTION MIX The combination of distribution channels a firm selects to get a product to end users.  Intermediary (middle men) are individual or firms other than the producer who participates in a product’s distribution o Wholesalers sell products to other businesses, which in turn resell them to the end users o Retailers sell products to end users  Distribution Channel is the a product follows from the producer to the end user o Channel 1: DirectDistribution of ConsumerProducts wheretheproducttravelsfrom the producer to the consumer without passing through any intermediary (IE: Tupperware, internet, airlines) o Channel 2: Retail Distribution where producers distribute products through retailers (IE: Levi’s produces jeans for Gap, offer internet sales) o Channel 3: Wholesale Distribution requires a large amount of floor space, both for storing merchandise and for displaying it in stores (IE: Convenience store, gas station) o Channel 4: Distribution Through Sales Agents or Brokers is a business person who represents a business and receives a commission in return, but never takes legal possession of the product  Sales Agents deal in the related product lines of a few producers and work on a long term basis (IE: Travel agents represent air lines)  Brokers match sellers and buyers as needed (IE: Real estate, buy and sells property)  Non-DirectDistributionmakesaprofitbychargingamarkuporcommission,meanshigherprices, the more intermediaries, the higher the final price o Creating Added Value is provided by intermediaries, value accumulates with each link in the supply chain, provide time saving information and make the right quantities of productsavailablewhereandwhenyouneedthem.Evenifintermediariesareeliminated, the costs associated with their functions are not. Intermediaries exist because they do necessary jobs in cost efficient ways o Channel 5: Distribution by Agents to Consumers and Businesses an agent functions as the sole intermediaries and the agent distributes to both consumers and business customers. E-commerce works well in this channel because it directly informs more people about products  Distribution of Business Products o Industrial (Business) Distribution is involved in the flow of manufactured goods to industrial customers o Channel 6: Direct Distribution of Business Products is where most business goods are sold directly bymanufacturer to theind
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