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Chapter 7-Pricing and Distributing Goods and Services

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University of Toronto Scarborough
Management (MGT)
H Laurence

Chapter 7: Pricing and distributing goods and Services Pricing Objectives and Tools Pricing - Deciding what the company will receive in exchange for its product Pricing to Meet Business Objectives Pricing Objectives - Goals that producers hope to attain in pricing products for sale Profit Maximizing Objectives - If prices are low, many units sold, but can lead to loss per unit - If prices are high, fewer units sold, more profit each, but can result in excess inventory - In calculating profits, managers weigh receipts against costs for materials, labour to create product - As well as capital resources, and cost of marketing Market Share Objectives Market Share - A companys percentage of the total market sales for a specific product Price Setting Tools Cost Oriented Pricing - considers the firms desire to make a profit and takes into account the need to cover production costs - Mark up percentage = Mark up Sales Price Break-Even Analysis: Cost-Volume-Profit Relationships Variable Costs - These costs that change with the number of goods or services produced or sold Fixed Costs - Those costs unaffected by the number of goods or services produced or sold Break-Even Analysis - An assessment of how many units must be sold at a given price before the company begins to make a profit Break Even Point - The number of units that must be sold at a given price before the company covers all of its variable and fixed costs. Break-even point (in units) = Total Fixed Costs (Price - Variable Costs) Pricing Strategies and Tactics Pricing Strategies Pricing Existing Products - Firms can set prices above, below or at prevailing market prices for similar products Price Leadership The dominant firm in the industry establishes product prices and other companies follow suit Pricing New Products Price Skimming The decision to price a new product as high as possible to earn the maximum profit on each unit sold Penetration Pricing The decision to price a new product very low to sell the most units possible and to build customer loyalty Pricing Tactics Price Lining The practise of offering all items in certain categories at a limited number of predetermined price points Psychological Pricing The practise of setting prices to take advantage of the non logical reactions of consumers to certain types of prices Odd-Even Pricing A form of psychological pricing in which prices are not stated in even dollar amounts Discounting Discount Any price reduction offered by the seller to persuade customers to purchase a product Cash Discount A form of discount in which customers paying cash, rather than buying on credit, pay lower prices Seasonal Discount A form of discount in which lower prices are offered to customers making a purchase at a time of year when sales are traditionally slow Trade Discount L8.4:39JL;03941L728L3;4O;0L3,574:.98L897L-:9L43 Quantity Discount A form of discount in which customers buying large amounts of a product pay lower prices
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