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Chapter 7-Pricing and Distributing Goods and Services

Management (MGT)
Course Code
H Laurence

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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 company's percentage of the total market sales for a specific product
Price Setting Tools
Cost Oriented Pricing
- considers the firm's 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
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
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
Quantity Discount ± A form of discount in which customers buying large amounts of a product pay lower prices
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