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Chapter 7

chap 7 (additional notes)

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Department
Economics
Course
ECN 510
Professor
Donald
Semester
Winter

Description
Chapter 7 • Pricing: deciding how much to sell products for • Pricing objectives: goals that producers strive to reach in pricing o To sell the number of unites that generates the highest total profits o E-Business: comparison shopping and direct link between buyers and sellers influence pricing • Market Share objectives: set prices low in order to increase customer base o Market share: percent of total sales in a market made by the company. • Loss containment/survival strategy (e.g. cutting prices on obsolete products to recover an investment). Price-Setting Tools • Cost-orienting pricing: o Markup is the difference between manufacturing price and selling price that takes into account additional costs. o Markup percentage = Markup/Sales Price (as a percent of revenue) • Break-even analysis o Consider variable costs (costs that change with number of units sold) and fixed costs (unaffected by number of units sold) to perform a break-even analysis (determining the number of unites that are required to sell in order to cover costs). o Break-even point (in units) = Total fixed costs/ (Price-Variable cost) [know how to do this for the exam] Pricing Strategies • Price leadership: dominant firm in the industry that establishes prices and other companies follow • Price-skimming strategy: to price as high as possible to maximize profit per unit (only works if the product is market as truly unique). • Penetration-pricing strategy: price a new product very low to move units and build customer loyalty. • Setting price points for items in categories, limiting the number of price points adds simplicity • Psychological pricing: setting prices to take advantage of consumer perceptions of certain types of prices o Odd-even psychological pricing (e.g. $99.99, not even a dollar amount, perceived lower than $100) • Discounting: price reductions on set prices to persuade consumer to buy o Cash discounts, seasonal discounts, trade discounts (in return for being a distributor), quantity discount (in return for buying in bulk) • International pricing: pricing a product lower in a foreign market than in a home market is called ‘dumping’ (it is illegal). It involves taking a loss to drive competitors out of business. Distribution • The distribution mix is just as important as the marketing mix discussed earlier • Intermediaries/middlemen: help distribute a producer’s goods ‘ o Wholesalers: sell products to other businesses who then sell to consumers o Retailers: sell directly to consumers • Non-direct distribution (using intermediaries) adds to the cost, but also adds value by doing their specific jobs more efficiently than the producer can. • 8 Primary Distribution Channels: o Direct channel: no intermediaries o Retail distribution of consumer products o Wholesale distribution (wholesaler between producer and retailer) o Distribution through sales agents and brokers: independent business person receives commissions for distributing merchandise o Distribution by agents to consumers and business: Agents are the only intermediary, sell directly to consumers or to businesses that consume the product (e.g. travel agents). • Distribution of business products used in manufacturing follow the following 3 channels: o Direct distribution of business products: manufacturers maintains a sales office o Wholesale distribution of industrial products: manufacturers produce in large quantity and buyers purchase in small quantities, requires wholesalers to break orders into smaller units o Wholesale distribution to businesses retailers (e.g. stores such as Staples, warehouse like retailers come after wholesalers in the distribution). • Distribution strategies: o Intensive distributions: product is distributed through every possible outlet using as many channels as possible  Works for low-involvement products such as candy where nothing but a visual presence is needed to sell the product o Exclusive distribution: only one retailer or wholesaler in a geographic area sells the product, good for high-cost product that maintain an image o Selective distribution: mi
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