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Published on 18 May 2011
School
UTSC
Department
Management (MGT)
Course
MGTA02H3
Pricing and Distributing Goods and Services
Pricing Objectives and Tools
Pricing to Meet business Objectives (profit maximizing; market share, survival)
pricing: deciding what the company will receive in exchange for its product
pricing objectives: goals that producers hope to attain in pricing products for sale
profit maximizing objectives : company must set price at a level where it makes maximum profit for
each item, and sells the maximum number of items (ex. Coca-Cola raising prices when temperature rises,
Senators raising prices when playing division rivals)
pricing for Ebusiness objectives: lower prices and costs; more direct link between producer and
consumer (no wholesaler); easy comparison shopping; joining forces for greater purchasing power is easier
for businesses and consumers
market share: a companys percentage of the total market sales for a specific product
market share objectives : companies use prices to establish market share; lower prices likely means
more people will be willing to try new product. Lowering price in order to get a larger market share. Will
make a small sacrifice but will result in larger profits overall
odominating a market means consumers are more likely to buy a certain product because
they are familiar with the label
osometimes the main objective of a company is loss containment and survival (rather than
profit maximizing or market share); ex. John Deere priced agricultural equipment low enough to ensure
survival
Price Setting Tools
cost oriented pricing: must take costs (insurance, advertising, products) into consideration when
pricing items to make profit (doesn’t apply to movies)
omarkup percentage = markup / sales price
using cost oriented pricing, variable costs are covered, some of fixed costs are covered, but to plan
profit, a break-even analysis is necessary (this will show the relationship between cost, volume, and
profits)
ovariable costs: those costs that change with the number of goods or services products
ofixed costs: those costs unaffected by the number of goods or services produced or sold
obreak-even analysis: as assessment of how many units must be sold at a given price before
the company begins to make a profit
obreak-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)
BEP: Profit = 0
Pricing Strategies and Tactics
Pricings Strategies (new products, old products)
pricing existing products : 3 options- price above, below or near market price
opricing above makes product seem to have superior quality
opricing below can be successful if quality is acceptable
price leadership: the dominant firm in the industry establishes product prices and other companies
follow suit (ex. in steel, gasoline, processed food)
price fixing: the illegal process of producers agreeing among themselves what prices will be charged
pricing new products : 2 options- price skimming, penetration-pricing
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oprice skimming strategy: the decision to price a new product as high as possible to earn
the maximum profit on each unit (revenue often used to cover initial costs, ex. HDTVs)
openetration pricing strategy: the decision to price a new product very low to sell the most
units possible and to build customer loyalty
fixed versus dynamic pricing for Ebusiness:
odynamic pricing: works because millions of people are easily notified of changes in prices
(sales can also be altered privately); ex. ebay.com
ofixed pricing: most common option for cyber shoppers (ex. Amazon.com) but dynamic
pricing is gaining popularity
Pricing Tactics (price lining, psychological pricing, discounting tactics)
price lining: the practice of offering all items in certain categories at a limited number of
predetermined price points (ex. all mens suits for $175, $250 or $400)
psychological pricing: the practice of setting prices to take advantage of the non-logical reactions of
consumers to certain types of prices
oodd-even psychological pricing: a form of psychological pricing in which prices are not
stated in even dollar amounts (consumers see $9.99 as significantly less than $10)
discounting: used to stimulate sales
odiscount: any price reduction offered by the seller to persuade customers to purchase a
product
ocash discount: a form of discount in which customers paying cash, rather than buying on
credit pay lower prices
oseasonal discount: a form of discount in which lower prices are offered to customers
making a purchase at a time of year when sales are traditionally slow
otrade discounts: a discount given to firms involved in a products distribution. Wholesale
and design pa y less than consumers (people within the business will pay less than someone outside of it)
oquantity discounts: a form of discount in which customers buying large amounts of a
product pay lower prices
The Distribution Mix
distribution mix: the combination of distribution channels a firm selects to get a product to end-users
Intermediaries
intermediary: any individual or firm other than the producer who participates in a products
distribution (once called middlemen; generally called wholesalers or retailers
owholesalers: intermediaries who sell products to other businesses, which in turn resell
them to end-users
oretailers: intermediaries who sell products to end-users
distribution of consumer products: 8 channels
odistribution channel: the path a product follows from the producer to the end-user
ochannel 1: direct distribution of consumer products
direct channel: a distribution channel in which the product travels from the
producer to the consumer without passing through any intermediary (ex. Avon, Tupperware, Gateway,
airline rsvn.)
ochannel 2: retail distribution of consumer products:
producers use retailers to distribute products (ex. Goodyear has own retail outlets,
Levi has own but produces for Gap as well)
ochannel 3: wholesale distribution of consumer products
once the most widely used non-direct method of distribution; requires large
amount of floor space for display and storage,
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Document Summary

Pricing and distributing goods and services pricing: deciding what the company will receive in exchange for its product pricing objectives: goals that producers hope to attain in pricing products for sale profit maximizing objectives. Pricing to meet business objectives (profit maximizing; market share, survival) : company must set price at a level where it makes maximum profit for each item, and sells the maximum number of items (ex. Senators raising prices when playing division rivals) consumer (no wholesaler); easy comparison shopping; joining forces for greater purchasing power is easier for businesses and consumers. : companies use prices to establish market share; lower prices likely means more people will be willing to try new product. Lowering price in order to get a larger market share. John deere priced agricultural equipment low enough to ensure survival. Pricings strategies (new products, old products) pricing existing products.