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Chapter 17

RSM 100 - Chapter 17 - Summary Notes

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University of Toronto St. George
Rotman Commerce
John Oesch

RSM 100Y – Chapter 17: Pricing and Distribution of Goods/Services Pricing Objectives Goals that the firm wishes to achieve through pricing (profits, image…etc) Profit-Maximizing Objectives There are many ways to price objects. If the price is too low, additional profits are missed. If too high, nothing is sold… Price Discrimination! Market Share Objectives Set low prices for new products to get buyers to try products to establish a market share within an industry. Other Objectives During a recession, loss containment may be an objective, or general company survival based on new forms of competition (CDs and Napster) Price Setting Tools Cost-Oriented Pricing Targets a firms profit goal, and pricing accordingly to cover costs and earn a certain percentage as profit. The percentage is known as a mark-up. Cost oriented pricing does not always work for all products (tickets) Markup Percentage = Markup/Sales price Break-even Analysis Through cost oriented pricing, a firm must cover its variable costs to earn a profit, and must cover fixed costs to prevent shutting down. Breakeven Point = Total Fixed Costs/(Price-Variable Costs) OR (Similar to Total Profitability = 0) Profit = Total Revenue – (Total Fixed + Total Variable Costs), Profit = 0 Pricing Strategies Pricing Existing Products Pricing above the market price sends the message of high quality Pricing below the market price send the message of better value (Assuming the quality is at least decent) Some firms can become price leaders (not price fixing) where all other firms will follow their pricing strategy, it’s very common in perfectly competitive markets, differentiation by advertising not price. Pricing New Products Price Skimming is a strategy where they price as high as possible during introduction to reap the largest profits from certain buyers (usually Tech). Penetration-Price Strategy is one where the price point is set very low to incite purchases and build customer loyalty due to the low risk. Fixed vs. Dynamic Pricing Online, the wealth of information allows a company to price a product privately with each customer to fully exploit their consumer surplus. Pricing Tactics Price Lining Selling multiple items in one category of goods at a selection of only a few different levels of prices, forcing consumers to pick one Psychological Pricing Takes advantage of irrational purchasing habits of consumers, uses odd- even pricing by taking a cent off a good to make it seem cheaper. Discounting Offering a lower price for various reasons to stimulate sales: - Cash Discount: Cheaper goods if paid with cash - Seasonal Discount: Out of season goods are cheaper - Trade Discount: Industrial buyers pay cheaper fees - Quantity Discount: Buy more, pay less Distribution Mix Intermediaries Going through a middleman (a wholesaler or a retailer) to sell product Distribution Channels (Consumer) Path that a product follows from producer to end-user (4 Channels) 1. Direct Distribution a. Bringing the product from manufacturer to Consumer 2. Retail Distribution a. Through their own outlet (or only 1 middle man) 3. Wholesale a. Through a wholesaler who stores products, sells them to retailers, and then to consumers 4. Sales Agents or Brokers a. Represent the producer, and sells on behalf of them without ever actually taking ownership of the product Pros and Cons Each chain of the distribution channel has a the con of higher prices per stage. However, the middlemen offer added value of saving time of the consumers by putting all the products into one place. 5. Distribution by Agents **(Different from #4)** a. Agent functions as the sole intermediary, and the agent distributes to both consumers and business customers Distribution Channels (Business) 6. Direct Distribution a. Sold from manufacturer to industrial buyer 7. Wholesale a. Mostly computers and supplies, produces them in large quantities and is distributed by a wholesaler since most end- users don’t buy these types of items in bulk 8. Wholesale Distribution to Retailers a. Buying from retailers like Business Depot, or Office Max Distribution Strategies Intensive Distribution (Cheap goods, like chocolate bars) A strategy where the product is distributed in every possible manner to every possible customer in existence Exclusive Distribution (High-Cost, Prestige Products) A distribution strategy in which a product’s distribution is limited to one retailer per geographic area Selective Distribution (Most consumer products) In between the other two, selects those retailers who will give special attention to the product in terms of sales efforts Channel Conflict and Leadership Often, Channe
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