Business Chapter #7 Notes – Pricing and Distributing Goods and
Consumers want products that satisfy their needs, and they want them to be available in the right
places, but they also look aggressively for the lowest prices possible.
Pricing Objectives and Tools
In pricing, managers decide what the company will receive in exchange for its products.
Companies often price products to maximize profits, but they also hope to attain other pricing
objectives when selling their products. 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 even by corporate image.
Pricing to maximize profits is tricky. If prices are set too low, the company will probably sell
many units of its product, but it many miss the opportunity to make additional profit on each unit
– an may in fact lose money on each exchange. Conversely, if prices are set too high, the
company will make a large profit on each item but will sell fewer units, resulting in excess
inventory and a need to reduce production operations. Again, the firm loses money. To avoid
these problems, companies try to set prices to sell the number of units that will generate the
highest possible total profits.
Marketers pricing for sale on the internet must consider different kinds of costs and different
forms of consumer awareness than those pricing products to be sold conventionally. Many
ebusinesses are lowering both costs and prices because of the internet’s unique marketing
capabilities. Because the web provides a more direct link between producer and ultimate
consumer, buyers avoid the costs entailed by wholesalers and retailers. Another factor in lower
internet prices is the ease of comparison shopping.
In the long run, a business must make a profit to survive. Many companies initially set low prices
for new products. They are willing to accept minimal profits – even losses – to get buyers to try
products. They use pricing to establish market share: a company’s percentage of the total
market sales for a specific product.
Whatever a company’s objectives, managers must measure the potential impact before deciding
on final prices. Two basic tools are often used for this purpose: cost orientated pricing and
Cost orientated pricing considers the firm’s desire to make a profit and takes into account the
need to cover production costs. Markup is usually stated as a percentage of selling price.
Markup percentage = Markup/Sales Price
Using cost oriented pricing, a firm will cover its variable costs – costs that change with the
number of goods or services produced or sold. It will also make some money toward paying its
fixed costs – costs that are 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 Cost
Pricing Strategies and Tactics
A firm can set prices for its products above prevailing market prices for similar products, below
the prevailing price, or at the prevailing price. Companies pricing above the market play on
customers’ beliefs that higher price means higher quality. Pricing below the prevailing market
price can succeed if the firm can offer a product of acceptable quality while keeping costs below
those of higher priced options.
Price Leadership – The dominant firm in the industry establishes product prices and other
companies follow suit. Companies compete through advertising campaigns, personal selling, and
service, not price.
Companies introducing new products into the market have to consider two contrasting pricing
policy options: coming in with either a very high price or a very low one. Price skimming –
setting an initially high price to cover costs and generate a profit – may generate a large profit on
each item sold. The revenue is often needed to cover development and introduction costs.
Penetration pricing – setting an initially low price to establish a new product in the market –
seeks to create consumer interest and stimulate trial purchases.
Companies selling multiple items in a product category often use pricing lining – offering all
items in certain categories at a limited number of prices.
Psychological pricing takes advantage of the fact that customers are not completely rational
when making buying decisions. One type of psychological pricing, odd even pricing is based on
the theory that customers prefer prices that are not stated in even dollar amounts.
The price that is eventually set for a product is not always the price at which all items are sold.
Many times a company has to offer a price reduction – a discount – to stimulate sales. In recent
years, cash discounts have become popular. Stores may also offer seasonal discounts to
stimulate the sales of products during times of the year when most customers do not normally
buy the product. Trade discounts are available only to those companies or individuals involved
in a product’s distribution. Thus, wholesalers, retailers, and interior designers pay less for fabric
than the typical consumer does. Quantity discounts involve lower prices for purchases in large
quantities. Discounts for cases of motor oil or soft drinks at retail stores are examples of quantity
The Distribution Mix
Distribution Mix – the combination of distribution channels a firm selects to get a product to end
users Once called middlemen, intermediaries are the individuals and firms who help distribute a
producer’s goods. They are generally classified as wholesalers or retailers. Wholesalers sell
products to other businesses, which resell them to final consumers. Retailers sell products
directly to consumers. While some firms rely on independent intermediaries, other employ their
own distribution networks and sales forces.
A distribution channel is the path that a product follows from producer to end-user.
Direct channel – A distribution channel in which the product travels from the producer to the
consumer without passing through any intermediary
Sales Agent (or broker) – An independent business person who represents a business and
receives a commission in return, but never takes legal possession of the product
Each link in the distribution chain makes a profit by charging a markup or commission. Thus,
non direct distribution means higher prices. The more members in the channel – the more
intermediaries – the higher the final price. In general, markup levels depend on competitive
conditions and practices in a particular industry.
Intermediaries provide added value by saving consumers both time and money. Moreover, the
value accumulates with each link in the supply chain. Even if intermediaries are eliminated, the
costs associated with their functions are not. Intermediaries exist because they do necessary jobs
in cost efficient ways.
Industrial channels are important because every company is also a customer that buys other
companies’ products. Industrial (business) distribution is the network of channel members
involved in the flow of manufactured goods to business customers.
Most business goods are sold directly by the manufacturer to the industrial buyer. Many
manufacturers maintain sales offices as contact points with customers and headquarters for
A distribution network can make the difference between success and failure for a company
because the choice of distribution strategy determines the amount of market exposure the product
gets and the cost of that exposure. Three strategies – intensive, exclusive, and selective
distribution – provide different degrees of market coverage. Intensive distribution means
distributing a product through as many channels and channel members (using both wholesalers
and retailers) as possible.
In contrast, exclusive distribution occurs when a manufacturer grants the exclusive right to
distribute or sell a product to one wholesaler or retailer in a given geographic area. Exclusive
distribution agreements are most common for high cost, prestige products.
Selective distribution falls between intensive and exclusive distribution. A company that uses
this strategy carefully selects only wholesalers and retailers who will give special attention to the
product in terms of sales efforts, display position, etc.
Wholesaling In addition to storing products and providing an assortment of products for their customers,
wholesalers offer delivery, credit, and information about products. The specific services that
wholesalers offer depend on the type of intermediary involved: merchant whole-saler or
Most wholesalers are independent operators who derive their income from sales of goods
produced by a variety of manufacturers. All merchant wholesalers take title to merchandise.
That is, merchant wholesalers buy and own the goods they resell to other businesses. They
usually provide storage and a means of delivery. A full-service merchant wholesaler provides
credit, marketing, and merchandising services. Limited function merchant wholesalers provide
only a few services, sometimes merely storage.
Agents and brokers, including internet e-agents, serve as sales forces for various manufacturers.
They are independent representatives of many companies’ products. The value of agents and
brokers lies primarily in their knowledge of markets and their merchandise expertise. They
provide a wide range of services including shelf and display merchandising and advertising
layout and they maintain product saleability.
Retail operations in Canada vary as widely by type as they do by size. They can be classified in
various ways: by pricing strategies, location, range of services, or range of product lines. Retail
stores are classified two ways: product line retailers and bargain retailers
Retailers that feature broad product lines include department stores, which are organized into
specialized departments such as shoes, furniture, women’s clothing, etc. Stores are usually large
and handle a wide range of goods and they offer a variety of services such as generous return
policies, credit plans, and delivery. Similarly, supermarkets are divided into departments of
related products: food products, household products, and so forth. The emphasis is on low prices,
self-service, and wide selection.
In contrast, specialty stores are small stores that carry one line of related products.
Bargain retailers carry wide ranges of products and come in many forms. The first discount
houses sold large numbers of items (such as televisions and other appliances) at substantial price
reductions to certain customers. As they became firmly entrenched, they began moving to better
locations, improving décor, and selling better quality merchandise at higher prices. Wal Mart and
Zellers are bargain retailers.
Catalogue showrooms use mail catalogues to attract customers into showrooms to view display
samples, place orders, and wait briefly while clerks retrieve order from attached warehouses.
Factory outlets are manufacturer owned stores that avoid wholesalers and retailers by selling
merchandise directly from factory to consumer. The warehouse club (or wholesale club) offers
large discounts on a wide range of brand name merchandise to customers who pay annual
Convenience stores – Retail stores that offer high accessibility, extended hours, and fast service
on selected items Non-store retailing also includes direct-response retailing, in which firms contact customers
directly to inform them about products and to receive sales orders. The oldest form of retailing,
direct selling, is still used by companies that sell door to door or through home selling parties.
Mail order (catalogue marketing), is a form of non store retailing in which customers place
orders for merchandise shown in catalogues and receive their orders via mail. Telemarketing is
the use of the telephone to sell directly to consumers.
Electronic retailing – non store retailing in which information about the seller’s products and
services is provided over the internet, allowing consumers to receive the information and
purchase the products in the home.
Physical Distribution – those activities needed to move a product from the manufacturer to the
Warehousing – that part of the distribution process concerned with storing goods
There are two basic types of warehouses: private and public. Facilities can be further divided
according to use as storage warehouses or distribution centers.
Private warehouses are owned by a single manufacturer, wholesaler, or retailer. Most are run by
large firms that deal in mass quantities and need regular storage. Public warehous