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Chapter 17

Part 4 Chapter 17


Department
Rotman Commerce
Course Code
RSM100Y1
Professor
John Oesch
Chapter
17

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Part 4 Chapter 17
Pricing Objectives and Tools
Pricing – deciding what the company will receive in exchange for its product
Pricing to Meet Business Objectives
Pricing objectives – goals that producers hope to attain in pricing products
for sale
Some want to maximize profit
Others try to achieve high market share
Profit Maximizing Objectives
If prices are set too low, company will sell many units but may miss
opportunity to make additional profit on each unit, lose money on each
exchange
If set too high, company will make large profit but sell fewer units, excess
inventory and need to reduce production operations, loses money
Strategy of charging prices based on market conditions
Using prices to manage traffic patterns
Toll road fees
Firms calculate profits by comparing revenues against costs for materials and
labour to create the product
Also consider capital resources, cost of marketing
Many firms set prices to achieve a targeted level of return on sales or capital
investment
Market Share Objectives
Set low prices for new products to get buyers to try products
Trying to establish market share – a company’s percentage of total market
sales for a specific product
Even with established products, market share > profits
Other Pricing Objectives
In difficult economic times, loss containment and survival may become
company’s main objectives
Price –Setting Tools
Must measure potential impact before deciding final prices
Cost-Oriented Pricing
Considers firm`s desire to make a profit and takes into account need to cover
production costs

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Store rent, employee wages, utilities, product displays, insurance and
cost of buying CDs
Markup – accounting all costs compared to buying price
Eg. CD bought for 8 dollars, makes a profit at 15, thus markup =
$7
Markup percentage = Markup/sales price
Out of every dollar taken in, % = cents, will be taken as gross profit of the
store
Markup as percentage of cost, CD bought of $8, markup $7
Markup/total cost
cost oriented pricing not always used – eg. Movies, same price for ticket
regardless of how much it costs to make
Break Even Analysis: Cost-Volume-Profit Relationships
using cost-oriented pricing, firm will cover variable costs – costs that
change with the number of goods or services produced or sold
will also make money toward paying fixed costs – those costs unaffected by
the number of goods or services produced or sold
break-even analysis – assessment of how many units must be sold at a
given price before company begins to make a profit
break-even point – the number of units that must be sold at a given price
before company covers all of its variable and fixed costs
break-even point (in-units) = total fixed costs/ (price-variable
costs)
Profit = total revenue – (total fixed costs + total variable costs)
Pricing Strategies and Tactics
pricing strategy – pricing as a planning actvitiy that affects the marketing mix
pricing tactics – ways in which managers implement a firm`s pricing
strategies
Pricing Strategies
can managers identify single best price for a product, no
Tylenol and Advil vary in price by 100%
Reflect differences in product costs, but also differing brand
image
How important is pricing as an element in marketing mix
Has major impact on company revenues
Pricing Existing Products
Firm can set price for exsisting products above, at or below market price
High price might mean higher quality

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Pricing below market price can succeed if firm can offer product of
acceptable quality while keeping costs below higher-priced option
Price leadership – dominant firm in the industry establishes product prices
and other companies follow suit
Compete through ad campaigns, personal selling, services
Pricing New Products
Need to enter market either with a really high price or really low place
Price skimming- decision to price a new product as high as possible to earn
the maximum profit on each unit sold
Revenue cover costs of development and introduction costs
Works only if consumers are convinced that prouct is different
Penetration pricing – the decision to price a new product very low to sell
the most units possible and to build customer loyalty
Stimulate trial purchases & consumer loyalty
Fixed vs. Dynamic Pricing for Ebusiness
Electronic marketplace introduced highly variable pricing system as
alternative to more conventional, stable pricing structure
Dynamic pricing – information flows on web notify millions of buyers of
instantaneous changes in product availability
Sellers can alter prices privately, on one-to-one, customer-to-customer
basis
Pricing Tactics
Price Lining
Price lining –practice of offering all items in certain categories at a limited
number of predetermined price points
Suits at only 175, 250, 400
Psychological Pricing
Psychological pricing – practice of setting prices to take advantage of
nonlogical reactions of consumers to certain types of prices
Odd-even pricing – form of psychological pricing in which prices are not
stated in even dollar amounts $99.95 instead of $100.00
Discounting
Discount – any price reduction offered by the seller to persuade customers
to purchase a product
Cash discount – a form of discount in which customers paying cash, rather
than buying credit, pay lower prices
Seasonal discounts – 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 discount – a discount given to firms involved in a product’s
distribution
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