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Chapter 7

MGTA02H3 Chapter Notes - Chapter 7: Psychological Pricing, Price Skimming, Tacit Collusion


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird
Chapter
7

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PRICING OBJECTIVES AND TOOLS
-pricing: deciding what the company will receive in exchange for its product
Pricing to Meet Business Obejctives
-pricing objectives: goals that producers hope to attain in pricing products for sale
-companies price their products in objective for profit-maximization
-market share: a companys % of total market sales for a specific product
-during difficult times, survival may become companys objective
Price Setting Tools
-cost oriented pricing considers the firm’s desire to make a profit and takes into account the
need to cover production costs
Markup % = markup/sales price
-every dollar made, (if markup is 50), 0.50$ would be gross profit for store.
-variable costs: costs that change w/the number of goods/services produced or sold
-fixed costs: costs unaffected by the # of goods/services produced or sold
-break-even analysis: an assessment of how many units must be sold @ a given price before
the company begins to make a profit
-break even point: the # of units that must be sold @ a given price before the company covers
all of its variable and fixed costs.
-break even point(units) = total fixed costs/ (price - variable cost)
-profit (@0) = total revenue - (total fixed costs + total variable costs)
PRICING STRATEGIES AND TACTICS
-a firm can set price above/below or @ the price of old product.
-if set above, people think its higher quality
Pricing Strategies
-price leadership: the dominant firm in the industry establishes product prices and other
companies follow along.
-price skimming: the decision to price a new product as high as possible to earn the maximum
profit on each unit sold
-penetration pricing: the decision to price a new product very low to sell the most units
possible and to build customer loyalty.
Pricing Tactics
-price lining: the practice of offering all items in certain categories @ a limited # of
predetermined price points
-psychological pricing: the practice of setting prices to take advantage of the nonlogical
reactions of consumers to certain types of prices
-odd-even psychological pricing: a form of psychological pricing in which prices are not
stated in even dollar amounts. (e.g. 99.95$ seems less than 100$)
-discount: any price reduction offered by the seller to persuade customers to purchase a product
-cash discount: consumers paying cash rather than credit gets a better deal
-seasonal discounts: lower prices are offered to customers making a purchase @ a time of
year when sales are traditionally low
MGTA04 Chapter 7
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