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Lecture

MGTA02H3 Lecture Notes - Telemarketing, Office Depot, Fax


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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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 for sales on the internet must consider different kinds of costs 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.
Cost Oriented Pricing considers the firm’s desire to make a profit and takes into account the need
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 unaffected by the number of goods or services produced or sold
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.

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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 Price Leadership is when the dominant firm in the industry establishes product prices and
other companies follow suit (IE: Gasoline)
Pricing New Products
o Price Skimming Strategy is the decision to price a new product as high as possible to earn
the maximum profit on each unit sold, revenue needed to cover development and
introduction costs, only works if marketers can convince consumers that a product is truly
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)
Discounting is a price reduction offered by the seller to persuade customers to purchase a product
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 Quantity Discount is which customers buying large amounts of a product pay lower prices
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
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