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study guide


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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Chapter 7: Pricing and Distributing Goods and Services
PRICING OBJECTIVES AND TOOLS
-the price element of the marketing mix has become competitive
-it influences both consumer demand for a product, and company profitability
-pricing: deciding what the company will receive in exchange for its product
Pricing to Meet Business Objectives
-companies often price products to maximize profits, but also hope to attain other pricing
objectives
-pricing objectives: goals that producers hope to attain in pricing products for sale
-some firms want to dominate the market or secure high market share
-pricing decisions are also influenced by the need to survive in the marketplace, by social and
ethical concerns, and by corporate image
Profit-Maximizing Objectives
-companies try to set prices to sell the number of units that will generate the highest total profits
-companies often try new pricing systems
-in calculating profits, managers weigh receipts against costs for materials and labour to create
the product
-they also consider the capital resources that the company must tie up to generate that level of
profit
-the costs of marketing (such as maintaining a large sales staff) can also be substantial
Pricing for Ebusiness Objectives
-marketers pricing for sales on the internet must consider different kinds of costs and different
forms of consumer awareness
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-ebusinesses are lowering prices, due to the internets unique marketing capabilities
-there is a more direct link between producer and ultimate consumer, buyers avoid the costs
entailed by wholesalers and retailers
-prices are also lowered, because of the ease of comparison shopping
-both consumers and businesses can force lower prices by joining together in the internet of
greater purchasing power
Market Share Objectives
-many companies initially set low prices for new products
-they are willing to accept minimal profits—even losesto get buyers to try products
-they use pricing to establish market share
-market share: a companys percentage of the total market sales for a specific product
-even with established products, market share may outweigh profits as a pricing objective
Other Pricing Objectives
-sometimes, neither profit maximizing nor market share is the best objective
-during difficult economic times, loss containment and survival may become a company’s main
objectives
Price-Setting Tools
-managers must measure the potential impact before deciding on final prices
-two basic tools are: cost-oriented pricing and break-even analysis
-these tools are combined to indentify prices that will allow the company to reach its objectives
Cost-Oriented Pricing
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-cost-oriented pricing considers the firms desire to make a profit
-takes into account the need to cover production costs
-the manager must account for product and other costs and set a figure for profit
-these figures constitute markup
-markup is usually stated as a percentage of selling price
-markup percentage is calculated as:
Markup percentage= Markup / Sales Price
-out of every dollar taken in, the markup percentage will be gross profit for the store
-from this profit, the store must still pay rent, utilities, and all other costs
-markup can also be expressed as a percentage of cost: (cost of markup / cost to manufacture a
product)
-in some industries, cost-oriented pricing doesnt seem to work, example: a movie theatre
-market=based pricing is at work here
-consumers are simply not willing to pay more than a certain amount to see a movie
Break-even Analysis: Cost-Volume-Profit Relationships
-a firm will cover its variable costs
-variable costs: those costs that change with the number of goods or services produced or sold
-it will also make some money paying its fixed costs
-fixed costs: those costs unaffected by the number of goods and 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
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