MGTA04 Textbook Notes, Chapter 7, The 4 P's - Price

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Management (MGT)
Course Code
Bovaird/ Mc Conkey/ Lawrence

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Chapter 7 – The 4 P’s (Price) PRICING OBJECTIVES AND TOOLS  Price 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  Pricing objectives – goals that producers hope to attain in pricing products for sale Profit-Maximizing Objectives  If prices are too low, the company will probably sell many units of its product, but will miss the opportunity to make additional profit on each unit (possibly lose money on each exchange)  If prices are set too high, the company will make a large profit on each item but will sell few units, resulting in excess inventory and a need to reduce production operations (lose money)  In calculating profits, mangers weigh receipts against costs for materials and labour to create the product, and consider capital resources (plant and equipment) that the company needs to generate that level of profit (and if substantial, costs of marketing, i.e. large sales staff)  Concern over the efficient use of these resources has led many firms to set prices so as to achieve a targeted level of return on sales or capital investment Pricing for Ebusiness Objectives  Ebusineses are lowering both costs and prices because of the internet’s unique marketing capabilities  Web provides a more direct link between producer and ultimate consumer, avoiding costs entailed by wholesalers and retailers  Online shopping is more efficient and easy for comparison shopping  Consumers and businesses can force lower prices by joining together in the interest of greater purchasing power Market Share Objectives  Many companies initially set low prices for new products, are willing to accept minimal profits (even losses) to get buyers to try products  Market share – a company’s percentage of the total market sales for a specific product  Dominating a market means that consumers are more likely to buy the company’s products because they are familiar with a well-known, highly visible product Other Pricing Objectives  Loss containment and survival may become a company’s main objectives during difficult economic times  Others include social and ethical concerns Price-Setting Tools Cost-Oriented Pricing  Considers the firm’s desire to make a profit and takes into account the need to cover production and other costs associated with making the product available to shoppers  The manager sets a figure for profit (markup) based on product and other costs  Usually stated as a percentage of selling price (i.e. gross profit per dollar): markup percentage = markup / sales price  In some industries, cost-oriented pricing doesn’t work (i.e. movie tickets) Break-even Analysis: Cost-Volume-Profit Relationships  Using cost-oriented pricing, a firm will cover its variable costs (costs that change with the number of goods or services produced or sold) and fixed costs (those costs 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)  Zero profitability at the break-even point
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