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RSM 100Y – Chapter 17: Pricing and Distribution of Goods/Services
Goals that the firm wishes to achieve through pricing (profits, image…etc)
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.
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
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
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 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.
Selling multiple items in one category of goods at a selection of only a few
different levels of prices, forcing consumers to pick one
Takes advantage of irrational purchasing habits of consumers, uses odd-
even pricing by taking a cent off a good to make it seem cheaper.
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
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)
a. Through a wholesaler who stores products, sells them to
retailers, and then to consumers