MGTA02H3 Lecture : Chapter 7-Pricing and Distributing Goods and Services
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
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 ± $GLVFRXQWJLYHQWRILUPVLQYROYHGLQDSURGXFW¶VGLVWULEXWLRQ
Quantity Discount ± A form of discount in which customers buying large amounts of a product pay lower prices
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Document Summary
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 - a company"s percentage of the total market sales for a specific product. Chapter 7: pricing and distributing goods and services. Pricing - deciding what the company will receive in exchange for its product. Pricing objectives - goals that producers hope to attain in pricing products for sale. 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. Variable costs - these costs that change with the number of goods or services produced or sold.
