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Canada (161,877)
MGTA02H3 (363)
Chapter 7

chapter 7 notes

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Management (MGT)
Chris Bovaird

Chapter 7 Pricing and Distributing Goods and Services Notes Pricing Objectives and Tools N pricing deciding what the company will receive in exchange for its product Pricing to Meet Business Objectives N pricing objectives goals that producers hope to attain in pricing products for sale N pricing decisions are also influenced by need to survive in marketplace, by social and ethical concerns, even by corporate image Profit-Maximizing Objectives N if prices are set too low, the company will probably sell many units of its product, but it may miss opportunity to make additional profit on each unitand may in fact lose money on each exchange N 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, and, again, the firm loses money N to avoid these problems, companies try to set prices to sell the number of units that will generate the highest possible total profits N in calculating profits, managers weight receipts against costs for materials and labour to create the product, but they also consider the capital resources (plant and equipment) that the company must tie up to generate that level of profit N marketers pricing for sales on internet must consider different kinds of costs and forms of consumer awareness than those pricing products to be sold conventionallymany e-businesses are lowering costs and prices because of unique marketing capabilities Market Share Objectives N in the long run, a business must make a profit to survive; nevertheless, many companies initially set low prices for new products N they are willing to accept minimal profitseven lossesto get buyers to try products N market share a companys percentage of the total market sales for a specific product N even with established products, market share may outweigh profits as a pricing objective Price-Setting Tools N whatever a companys objectives, managers must measure the potential impact before deciding on final prices N two basic tools are often used for this purpose: cost-oriented pricing and break-even analysis Cost-Oriented Pricing N cost-oriented pricing considers the firms desire to make a profit and takes into account the need to cover production costs N mark-up percentage is calculated as follows: mark-up sales price N in some industries, cost-oriented pricing doesnt seem to workfor example, in movie theatres, the cost of each film is the same and it does not depend on how much it cost to produce the film Break-even Analysis: Cost-Volume-Profit Relationships N variable costs those costs that change with the number of goods or services produced or sold N fixed costs those costs unaffected by the number of goods or services produced or sold N using cost-oriented pricing, a firm will cover its variable costs and it will also make some money toward paying its fixed costs N break-even analysis assessment of how many units must be sold at a given price before the company begins to make a profit N break-even point number of units that must be sold at given price before the company covers all of its variable and fixed costs N break-even point (in units) = total fixed costs (price variable cost) N zero profitability at the break-even point can also be seen by using the following profit equation: Profit = total revenue (total fixed costs + total variable costs) Pricing Strategies and Tactics Pricing Strategies Pricing Existing Products N firm can set prices for products above prevailing market prices for similar products, below prevailing price, or at prevailing price N companies pricing above the market play on customers beliefs that higher price means higher quality N 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 optionsfor example, Budget and Dollar car rental companies vs. Hertz and Avis N price leadership the dominant firm in the industry establishes product prices and other companies follow suit N price leadership is evident in products such as structural steel, gasoline, and many processed foods because these products differ little in quality from firm to firm; instead, companies compete through ad campaigns, personal selling, and service, not price Pricing New Products N companies introducing new products have to consider 2 pricing policies: coming in with either very high price or very low one N price skimming strategy the decision to price a new product as high as possible to earn the maximum profit on each unit sold N penetration-pricing strategy decision to price new product very low to sell most units possible and to build customer loyalty Pricing Tactics N regardless of its pricing strategy, a company may adopt one or more pricing tactics, such as price lining or psychological pricing Price Lining N price lining the practice of offering all items in certain categories at a limited number of predetermined price points N three or four price points are set at which a particular product will be sold Psychological Pricing N psychological pricing practice of setting price to take advantage of non-logical reactions of customers to certain types of prices N odd-even psychological pricing a form of psychological pricing in which prices are not stated in even dollar amounts www.notesolution.com
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