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Chapter 7

chapter 7 notes


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

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Chapter 7 Pricing and Distributing Goods and Services Notes
Pricing Objectives and Tools
x pricing Æ deciding what the company will receive in exchange for its product
Pricing to Meet Business Objectives
x pricing objectives Æ goals that producers hope to attain in pricing products for sale
x pricing decisions are also influenced by need to survive in marketplace, by social and ethical concerns, even by corporate image
Profit-Maximizing Objectives
x 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 unit—and may in fact lose money on each exchange
x 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
x to avoid these problems, companies try to set prices to sell the number of units that will generate the highest possible total profits
x 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
x marketers pricing for sales on internet must consider different kinds of costs and forms of consumer awareness than those pricing
products to be sold conventionally—many e-businesses are lowering costs and prices because of unique marketing capabilities
Market Share Objectives
x in the long run, a business must make a profit to survive; nevertheless, many companies initially set low prices for new products
x they are willing to accept minimal profits—even losses—to get buyers to try products
x market share Æ a company’s percentage of the total market sales for a specific product
x even with established products, market share may outweigh profits as a pricing objective
Price-Setting Tools
x whatever a companys objectives, managers must measure the potential impact before deciding on final prices
x two basic tools are often used for this purpose: cost-oriented pricing and break-even analysis
Cost-Oriented Pricing
x cost-oriented pricing considers the firm’s desire to make a profit and takes into account the need to cover production costs
x mark-up percentage is calculated as follows: mark-up / sales price
x in some industries, cost-oriented pricing doesn’t seem to work—for 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
x variable costs Æ those costs that change with the number of goods or services produced or sold
x fixed costs Æ those costs unaffected by the number of goods or services produced or sold
x using cost-oriented pricing, a firm will cover its variable costs and it will also make some money toward paying its fixed costs
x break-even analysis Æ assessment of how many units must be sold at a given price before the company begins to make a profit
x break-even point Æ number of units that must be sold at given price before the company covers all of its variable and fixed costs
x break-even point (in units) = total fixed costs / (price – variable cost)
x 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
x firm can set prices for products above prevailing market prices for similar products, below prevailing price, or at prevailing price
x companies pricing above the market play on customers’ beliefs that higher price means higher quality
x 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 options—for example, Budget and Dollar car rental companies vs. Hertz and Avis
x price leadership Æ the dominant firm in the industry establishes product prices and other companies follow suit
x 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
x companies introducing new products have to consider 2 pricing policies: coming in with either very high price or very low one
x price skimming strategy Æ the decision to price a new product as high as possible to earn the maximum profit on each unit sold
x penetration-pricing strategy Æ decision to price new product very low to sell most units possible and to build customer loyalty
Pricing Tactics
x regardless of its pricing strategy, a company may adopt one or more pricing tactics, such as price lining or psychological pricing
Price Lining
x price lining Æ the practice of offering all items in certain categories at a limited number of predetermined price points
x three or four price points are set at which a particular product will be sold
Psychological Pricing
x psychological pricing Æpractice of setting price to take advantage of non-logical reactions of customers to certain types of prices
x odd-even psychological pricing Æ a form of psychological pricing in which prices are not stated in even dollar amounts
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Discounting
x discount Æ any price reduction offered by the seller to persuade customers to purchase a product
x cash discount Æ a form of discount in which customers paying cash, rather than buying on credit, pay lower prices
x seasonal discount Æ 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 (customer does not normally buy the product)
x trade discount Æ a discount given to firms involved in a product’s distribution
x quantity discount Æ a form of discount in which customers buying large amounts of a product pay lower prices
International Pricing
x pricing products for other countries is complicated because additional factors are involved—income and spending trends must be
analyzed; in addition number of intermediaries varies from country to country, as does effect on a product’s cost; exchange rates
change daily, there may be shipping costs, import tariffs must be considered, and different pricing agreements may be permitted
x sometimes companies try to increase their foreign market share by pricing products below cost, causing the product to be priced
lower in a foreign market than in its home market Æ called dumping, and it is illegal
The Distribution Mix
x distribution mix Æ the combination of distribution channels a firm selects to get a product to end-users
Intermediates and Distribution Channels
x intermediaries Æ any individual or firm other than the producer who participates in a product’s distribution
x wholesalers Æ intermediaries who sell products to other businesses, which in turn resell them to the end-users
x retailers Æ intermediaries who sell products to end-users
x while some firms rely on independent intermediaries, others employ their own distribution networks and sales forces
Distribution of Consumer Products
x distribution channel Æ the path a product follows from the producer to the end-user
x direct channel Æ distribution channel in which product travels from producer to consumer without passing through intermediary
x sales agent (or broker) Æ an independent business person who represents a business and receives a commission in return, but
never takes legal possession of the product (sales person)
The Pros and Cons of Non-Direct Distribution
x intermediaries provide added value by saving consumers time and money; moreover, value adds with each link in supply chain
x intermediaries provide time-saving information and make right quantities of products available where and when they are needed
x even if intermediaries are eliminated, the costs associated with their functions are not
Distribution of Business Products
x industrial (business) distribution Æ network of channel members involved in flow of manufactured goods to industrial customers
x sales offices Æ offices maintained by sellers of industrial goods to provide points of contact with their customers
Distribution Strategies
x a distribution network can make the difference between success and failure for a company because the choice of distribution
strategy determines the amount of market exposure the product gets and the cost of that exposure
x three strategies—intensive, exclusive, and selective distributionprovide different degrees of market coverage
x intensive distribution Æ a distribution strategy in which a product is distributed in nearly every possible outlet, using many
channels and channel members; normally used for low-cost consumer goods such as candy and magazines
x exclusive distribution Æ a distribution strategy in which a product’s distribution is limited to only one wholesaler or retailer in a
given geographic area; most common for high-cost, prestige products
x selective distribution Æ a distribution strategy that falls between intensive and exclusive distribution, calling for the use of a
limited number of outlets for a product; applied to virtually every type of consumer product
Wholesaling
x wholesalers provide a variety of functions for their customers, who are buying products for resale to consumers or to businesses
x in addition to storing products and providing assortment of products for customers, offer delivery, credit, and info about products
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