rsm100chapter17.docx

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Department
Rotman Commerce
Course Code
RSM100Y1
Professor
John Oesch

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Description
Chapter 17 Pricing: managers decide what the company will receive in exchange for its product Pricing objectives: goals that producers hope to attain in pricing products for sale o Some firms want to maximize profit, while others try to achieve a high market share o Pricing decisions are influenced by the need to survive in the marketplace, by social and ethical concerns, and by corporate image Pricing to maximize profits is tricky because if the prices are too low, it may miss the opportunity to make additional profit on each unit but if the prices are too high, it may sell fewer units, resulting in excess inventory and reduced profit Business firms calculate profits by comparing revenues against costs for materials and labour to create the product Many companies initially set low prices for new products as they are willing to accept minimal profits (even losses) to establish market sharea companys percentage of the total market sales for a specific product Even with established products, market share may outweigh profits as a pricing objective During difficult economic times, loss containment and survival may become a companys main objectives Managers measure potential impact before deciding on final prices, using o Cost oriented pricing: considers the firms desire to make a profit and takes into account the need to cover production costs You must consider other costs such as rent, wages, utilities, etc when determining price and so you will charge a markup price MARK UP PERCENTAGE = MARKUP / SALES PRICE i.e. if the markup percentage was, say, 46.5%, then for every dollar, 46.7 cents will be gross profit Markup can be in terms of costs, not sales price Using cost oriented pricing, a firm will cover its variable costscosts that change with the number of goods or services produced or sold The firm will also make some money toward paying its fixed costscosts that are unaffected by the number of goods or services produced or sold This method does not determine how many units must be sold before all of the fixed costs are covered and begins to make a profit o 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 = TOTAL FIXED COSTS / PRICE VARIABLE COSTS Even though charging a price that reaches break even point as early as possible sounds smart, its not always the best decision because the buyers may not be wiling to pay this much and competitors may be charging lower Pricing strategy: pricing as a planning activity that affects the marketing mix o A firm can set prices for its existing products above, below, or at the prevailing market price o Companies pricing above the market price play on customers beliefs that higher price means higher quality o Companies pricing below the prevailing market price can succeed if the firm can offer a product of acceptable quality while keeping costs below those higher priced options o Price leadership: dominant firm in the industry establishes product prices and other companies follow along Price leadership is different from price fixing, which is an illegal process of producers agreeing among themselves what prices will be charged Price leadership is often evident in products that differ little in quality from one firm to another (i.e. gasoline, processed foods, etc) o Price skimming: decision to price a new product as high as possible to earn the maximum profit on each unit sold Skimming works only if markets can convince consumers that a product is truly different from those already on the market o Penetration pricing: decision to price a new product very low to sell most units possible and to build customer loyalty o Whatever price strategy a company is using, it must be communicated to buyers o Dynamic pricing works because information flows on the web notify millions of buyers of instantaneous changes in product availability (as opposed to fixed price structures) Pricing tactics: ways in which managers implement a firms pricing strategies o Regardless of the companys pricing strategy, a company may adopt one or more specific pricing tactics Price lining: offering all items in certain categories at a limited number of prices 3 or 4 price points (predetermined prices) are set at which a particular product will be sold i.e. all mens suits priced at $175, $250, and $400 Psychological pricing: practice of setting prices to take advantage of the nonlogical 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 (i.e. a customer may think $99.95 is significantly lower than $100) Discount: any price reduction offered by the seller to persuade customers to purchase a product Cash discounts: customers paying cash, rather than buying on credit, pay lower p
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