Chapter 7 Textbook Notes

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10 Nov 2010

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MGTA04 / 01
Chapter 7: Pricing and Distributing Goods and Services
last few years
- Price is an important part of the marketing mix because it influences both consumers
demand for a product and company profitability
- Pricing is deciding what the company will receive in exchange for its product
Pricing to Meet Business Objectives
- Companies price products in order to maximize profits as well as attaining other pricing
objectives (goals that producers hope to attain in pricing products for sale. E.g. dominating
the market, surviving in the marketplace, social and ethnical concerns etc...)
Profit-Maximizing Objectives
- Pricing to maximize profit is tricky
o If price is too low: company may sell many units but will miss the opportunity of
making additional profit on each unit or may lose money
o If price is too high: company will make large profit on each item but may sell
fewer units resulting in excess inventory and reducing
production operations (again, the firm will be losing money)
- Therefore, firms set prices to sell the number of units that will generate the highest profit
- Companies may try out new pricing systems to try to increase profits
o Coca-Cola: tested a vending machine that raised the price of products when the
temperature rises and different prices on different vending machines
depending on how many customers use the machine
- In calculating profits, managers must weigh receipts with the costs for materials/labour to
create the product. As well as the capital resources (equipment) and marketing (staffs)
Pricing for Ebusiness Objectives
- Marketers pricing for sales on the internet must consider different kinds of costs and
different forms of consumer awareness
- Many ebusiness are lowering both their costs and prices because they are able to directly
communicate with the consumer rather than going through wholesalers/retailers
- Another factor is the convenience and ease of comparison shopping (more efficient)
Market Share Objectives
- Many new companies will initially set low prices for new products in order to establish
They are willing to accept minimal profits or even losses to get buyers to try their product
- Even with establish products, market share may outweigh profits as a pricing objective (e.g.
Philadelphia Brand Cream Cheese is well known and relatively cheap to buy)
Other Pricing Objectives
- In some instances, neither profit maximizing nor market share is the best objective. During
- E.g. in 2003, Universal cut the price of its CDs by one third due to complains about high CD
prices and competition from illegal downloading services
Price-Setting Tools
- Before deciding on final prices, two basic tools are used for this purpose: cost-oriented
pricing and break-even analysis
Price Objectives and Tools (pg. 151 ± 155)
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MGTA04 / 02
- These tools are combined to identify prices that will allow the company to reach its
Cost-Oriented Pricing
production costs
- E.g. music store manager would price CDs by calculating the cost of making them available
(store rent, employee wages, utilities, product displays, insurance, cost of buying CDs from
the manufacturer)
- Markup is usually stated as a percentage of selling price:
o Markup percentage (46.7%) = markup ($7) ÷ sales price ($15)
- Out of every dollar taken in, 46.7 cents will be gross profit for the store
- In some industries, cost oriented pricing does not work (e.g. when going to a movie theatre,
watching a movie that costed $200 million to make and a movie that costed $2 million will
cost the same, customers are not willing to pay more to watch a movie)
Break-even Analysis: Cost-Volume-Profit Relationships
- When 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 has some money to pay for its
fixed costs (costs unaffected by the number of goods or services produced or sold)
- A break-even analysis is an assessment of how many units must be sold at a given price
before the company begins to make a profit
- The break-even point determines the number of units that must be sold at a given price
before the company covers all of its variable and fixed costs
o E.g. fixed costs is $100,000, variable cost per CD is $8, selling price is $15
Break-even point = Total fixed costs = $100,000 = 14,286 CDs
(in units) Price ± Variable cost $15 - $8
- Selling more than 14,286 CDs: profit grows by $7 for each CD sold
- Selling less than 14,286 CDs: loses money for the year
- Selling exactly 14,286 CDs: cover all its cost but will earn zero profit
o Profit = total revenue - (total fixed costs + total variable costs)
o $0 = (14,286 CDs × $15) ± ($100,000 + [14,286 CDs × $8])
- %\VHWWLQJDSULFHKLJKHUWKDQVDOHVZLOO;LQWKHVWRUHDQGWKH break even pt. will differ
- The pricing tools provide a guide for managers to try to set prices but they do not provide
general direction for mangers trying to decide on a pricing philosophy for their company
- Below, we will describe pricing strategy ± pricing as a planning activity that affects the
marketing mix and pricing tactics ± ZD\VLQZKLFKPDQJHUVLPSOHPHQWDILUP¶VSULFLQJ
Pricing Strategies
- No single best price for a product since prices may differ greatly due to different brand
images that attract different types of consumers (different pricing philosophies & strategies)
- Pricing is extremely important to the overall marketing plans since it has a direct and visible
impact on revenues
Pricing Existing Products
- Firms can set prices for its products above, below or at the prevailing price
means higher quality (Rolls-Royce and Godiva chocolates)
Pricing Strategies and Tactics (pg. 155 ± 158)
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MGTA04 / 03
- Pricing below the prevailing price can succeed if the firm can offer a product of acceptable
quality while keeping costs below those of higher-priced options (e.g. Budget car rental)
- In some industries, firms establish price leadership which is when a dominant firm in the
industry establishes product prices and other companies follow suit (e.g. products that differ
little in quality from one firm to another ± gasoline, processed foods etc...)
- Companies compete through advertising campaigns, personal selling and service, not price
Pricing New Products
- Companies introducing a new product into the market have to consider two contrasting
pricing policy options: coming in with very high price or a very low one
- Price skimming is the decision to price a new product as high as possible to earn the
maximum profit on each unit sold
o only works if marketers can convince consumers that a product is truly different
from those already on the market (e.g. HDTVs, video games, video cameras etc...)
- Penetration pricing is the decision to price a new product very low to sell the most units
possible and to build customer loyalty
o Seeks to create consumer interest and stimulate trial purchases
Pricing Tactics
- Whatever the pricing strategy, a company may adopt one or more pricing tactics such as
price lining or psychological pricing or even discounting tactics
Pricing Lining
- Price lining is the practice of offering all items in certain categories at a limited number of
Psychological Pricing
- Psychological pricing is the practice of setting prices to take advantage of the nonlogical
reactions of consumers to certain types of prices
- One type of psychological pricing is odd-even pricing is a theory that customers prefer
prices that are not stated in even dollars (e.g. prices of $1,000, $100, and $10 are higher than
$999.95, $99.95 and $9.95)
- The price that is set for a product is not always the price at which all items are sold
- A discount is any price reduction offered by the seller to persuade customers to purchase a
product, it stimulate sales
- Cash discounts have became popular and they are a form of discount in which customers
paying cash, rather than buying on credit, pay lower prices
- Seasonal discounts is 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
- Trade discounts is a discount gLYHQWRILUPVLQYROYHGLQDSURGXFW¶VGLVWULEXWLRQ(e.g.
wholesalers and interior designers pay less for fabric than typical consumer does)
- Quantity discounts a form of discount in which customers buying large amounts of a
product pay lower prices (e.g. discount for buying a case of soft drinks)
International Pricing
- Pricing products for other countries is complicated because additional factors are involved
(income and spending trends)
- Exchange rates change daily (shipping costs), number of intermediaries, different types of
pricing agreements
- Some companies try to increase their foreign market share by pricing products below cost in
foreign market and higher costs in home market. This is illegal and is called dumping
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