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RSM100Y1 (431)
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Chapter 17

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Rotman Commerce
John Oesch

Pricing & Distributing Goods and Services [Chapter 17] Pricing objectives and tools Pricing to meet business objectives  Pricing objectives: goals that producers hope to attain in pricing products for sale o Profit maximizing objectives: based on market conditions but also want to maximize profits s don’t want to sell for too low  firms set prices to achieve a targeted level of return on sales or capital investment o Market share objectives: a company’s percentage of the total market sales for a specific product  so they make the prices lower even if it’s a loss, in order to get buyers to try products o Other pricing objectives: neither profit max or market share; loss containment and survival may be a companys main objectives Price setting tools  2 tools are used: cost oriented pricing and break even analysis are combined usually to identify prices that will allow the company to reach its objectives o Cost-oriented pricing: considers the firms desire to make a profit and takes into account the need to cover production costs  Markup is stated as % of selling price  markup/sales price (tells you how much gross profit goes to store) o Break-even analysis: cost-volume-profit relationships  Using cost oriented pricing, a firm will cover its variable costs (costs that change with the umber of goods or services produced or sold) and will make some money toward paying its fixed costs (unaffected by number of stuff sold)  Break-even analysis: an assessment of how many units must be sold at a given price before the company begins to make a profit  Break-even point: the number of units that must be sold at a price before the company covers all of its variable and fixed costs  total fixed costs/price-variable cost  Zero profitability at break even point can be seen using the profit equation: profit = total revenue – (total fixed costs + total variable costs) Pricing strategies and tactics  Pricing strategy: pricing as a planning activity that affects the marketing mix  Pricing tactics: ways in which managers implement a firms pricing strategies Pricing strategies  Pricing existing products: can set price above prevailing market prices for similar products or below the price at the price o Price leadership: the dominant firm in the industry establishes product prices and other companies follow suit  Pricing new products: have to consider 2 contrasting policy options o Price skimming: the decision to price a new product as high as possible to earn the max profit one ach unit sold o Penetration pricing: decision to price a new product very low to sell the most units possible and to build customer loyalty  Fixed vs. dynamic pricing for ebusiness: dynamic pricing works because info flow on the web and can alter your prices privately to different customers Pricing tactics  Price lining: practice of offering all items in certain categories at a limited number of predetermined price points  Psychological pricing: setting prices to take advantage of the nonlogical reactions of consumers to certain types of prices (based on idea that we aren’t rational when making buying decisions) o Odd-even pricing: a form of psyc pricing in which prices are not stated in even dollars (eg $99.99)  Discounting: any price reduction offered in order to persuade customers to buy o Cash discount: form of discount where customers paying cash, rather than buying on credit, pay lower prices o Seasonal discount: form of discount where lower prices are offered to those making a purchase at a time of yea when sales are traditionally slow o Trade discount: discount given to firms involved in a products distribution (wholesalers, retailers etc) o Quantity discounts: form of discount where customers buying large amounts of a product pay lower prices International pricing  Important to analyze income and spending trends when determining pricing for other countries o Exchange rates change daily, shipping costs, import tariffs must be considered The distribution mix  Success of any product depends in part on its distribution mix: combination of distribution channels a firm selects to get a product to end-users Intermediaries and distribution channels  Intermediaries: any individual or firm other than the producer who participates in a products distribution  Wholesalers: intermediaries who sell products to other businesses, which in turn resell them to the end users  Retailers: intermediaries who sell products to end-users  Distribution of consumer products: o a distribution channel—path a product follows from the producer to the end-user o Channel 1: direct distribution of consumer products: in a direct channel – channel in which the product travels from the producer to the consumer without passing through any intermediary o Channel 2: retail distribution of consumer products: producers distribute products through retailers o Channel 3: wholesale distribution of consumer products: wholesalers entered the distribution network to perform the storage function (since rising cost of store space lead many retailers not being able to afford both retail and storage space) o Channel 4: distribution through sales agents or brokers:  Sales agent (or brokers): independent business people who represent a business and receive a commission in return, but never take legal possession of the product  The pros and cons of non-direct distribution: o Each link in the distribution chain makes a profit by charging a markup or commission so non-direct distribution means higher prices (the more intermediaries in the channel, the higher the final price will be) o Intermediaries do not necessarily provide a low cost service o Channel 5: distribution by agents to consumers and businesses: differs from previous channels in 2 ways:  An agent functions as the sole intermediary  The agent distributes to both consumers and business customers o Ecommerce works well in this channel bc it directly informs more people about products  Distribution of business products o Industrial (business) distribution: the network of channel members involved in the flow of manufactured goods to business customers o Channel 6: direct distributing of business products: most business goods are sold directly by the manufacturer to the industrial buyer  Sales office: offices maintained by sellers of industrial goods to provide points of contact with their customers o Channel 7: wholesale distribution of industrial products: mostly handles accessory equipment (computers, fax machines, office equipment) and supplies  Manufacturer produce in large quantities and companies buy in small quantities o Channel 8: wholesale distribution to business retailers: small business buyers shop at discount stores designed for industrial users Distribution strategies  3 strategies- intensive, exclusive, and selective distribution o Intensive distribution: a strategy in which a product is distributed in nearly every possible outlet, using many channels and channel members o Exclusive distribution: strategy in which a products distribution is limited to only one wholesaler or retailer in a given geographic area o Selective distribution: strategy that falls between intensive and exclusive distribution, calling for the use of a limited number of outlets for a product  Select only wholesalers and retailers who will give special attention to the product in terms of sales efforts, display position etc Channel conflict and channel leadership  Conflict arising when members of a distribution channel disagree over the roles they should play or the rewards they should receive  Channel captain: the channel member that is the most powerful in determining the roles and rewards of organizations involved in a given channel of distribution o Conflicts are resolved when members efforts are coordinated and a key factor to this is a channel leadership  Vertical marketing system (VMS): system in which there is a high degree of coordination among all the units in the distribution channel so that a product moves efficiently from manufacturer to consumer o To overcome problems posed by channel conflict and issues of channel leadership Wholesaling  In addition to storing products and providing an assortment of products for their customers, wholesalers offer delivery, credit, and info about products  Specific services that they offer depend on the type of intermediary involved: merchant wholesaler, agent/broker, or e-intermediary Merchant wholesalers  Merchant wholesaler: An independent wholesaler that buys and takes legal possession of goods before selling them to customers – buy and own goods and then resell to others and usually they provide the storage and delivery  Full service merchant: merchant wholesaler that provides storage and deliver in addition to wholesaling services  Limited-function merchant wholesaler: an independent wholesaler that provides only wholesaling- not warehousing or transportation- services o Drop shipper: a type of wholesaler that does not carry inventory or handle the product – they receive the orders from customers, negotiates with producers to supply foods, takes title to them and arranges for shipment to customers o Rack jobber: a limited function merchant wholesaler specializing in non-food merchandise that se
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