Section 4: Trade and Commerce - Part 1: Selling and Buying

“Under capitalism man exploits man. Under socialism it’s just the opposite.”

ANON

A: Hear about Venables – one of the traders at Megabank? He lost over $1.000.000 last month.

    Apparently he hear from one of the secretaries that he was going to be sacked, so he decided to get his revenge on the bank.

     He got on his phone and made as many bad equity deals as he could – by his calculations he lost the bank another million in just fifteen minutes.

B: Gosh. What happened?

A: He made a profit of about sixty grand.

4.1 Ways of Selling 1

1.   Broker         : an agent in a particular market, such as securities, commodities, insurance, etc.

2.   Middlemen  : a general term for agents, brokers, dealers, merchants, traders, wholesalers, retailers, and other marketing intermediaries.

3.   Retailer        : a merchant such as a shokeeper who sells to the final customer.

4.   Outlet           : a place where goods are sold to the public – a shop, store, kiosk, market stall, etc.

5.   Sale force     : a collective term for a company’s sales representatives or commercial travellers.

                             GB Sales representatives, commercial travellers = US salespersons, traveling salesmen.

6.   Wholesalers :  an intermediary who stocks goods from various suppliers and delivers them to retailers when ordered.

7.   Distributor   : a person (generally a wholesalers) who stocks and resells components or goods to manufacturers or retailers.

8.   Customer     : a person (or company) who buys a product or service from a producer or a shop.

9.   Merchant      : a person who buys (and takes possession of) goods, and sells them on his or herown account.

10. Franchise      : a person who buys an exclusive right to sell certain products in a certain area (or to use a particular name).

11. Agent           : a person who negotiates purchases and sales in return for commission or fee.

12. Consumer     : the end-user of goods or services, whose needs are satisfied by producers.

4.2 Ways of Selling 2

4.2.1 PARAGRAPH: 

    Very few producers make their goods and sell them directly to their end-users from the same premises. There are usually specialized marketing intermediaries involved in getting goods or services to the right place  - a sales outlet convenient to consumers – at the right time. These intermediaries constitute a distribution chanel or a chain of distribution.

     The shortest chanel exists in cases of direct marketing, where the manufacturer sells direct to consumers, reaching them by telephone or direct mail or by way of its own sales reps, who contact existing and potential customers, and try to persuade them to buy goods or services. More common are channels with a single intermediary – e.g. a sales agent or broker for industrial goods, a retailer for consumer goods, an authorized dealer in the automobile industry, or a franchise in the fashion, car hire and fast-food business. More complex channels and further intermediaries such as wholesalers, and where goods are exported, very likely an agent as well.

     Marketing channels change over time. For example, in retailing, the development of department stores, chain stores, mail order firms, supermarkets, vending machines, hypermarkets on the edge of town, franchising systems, and so on, are on twentieth century developments. The twenty-first century promises virtual reality shopping.

4.2.2 Here are six popular quotations about the world of selling:

1. When buyers don’t fall for prices, prices must fall for buyers.

2. Pile it high and sell it cheap.

3. It is not enough to succeeds; others must fail.

4. A man without a smiling face must not open a shop.

5. Marketing is everything and everything is marketing.

6. If every new product is ‘improved’ then what were we bying before?

4.7 Pricing

     Companies’ pricing decisions depend on one or more of tree basic factors: production and distribution costs, the level of  demand, and the prices (or probable prices) of current and potential competitors. Companies also consider their overall objectives and their consequent profit or sales targets, such as seeking maximum revenue, or  maximum market share, etc. Pricing strategy must also consider market positioning: quality products generally require “prestige pricing” and will probably not sell if their price is thought to be too low.

     Obviously, firms with excess production capacity, a large inventory,  or a falling market share, tend to cut prices. Firms experiencing cost inflation, or in urgent need of cash, tend to raise prices. A company faced with demand that exceeds its possibility to supply is also likely to raise its prices.

     When sales respond directly to price variations, demand is said to be elastic. If sales remain stable after a change in price, demand is inelastic. Although it is an elementary law of economics that the lower the price, the greatest the sales, there are numerous exceptions. For example, price cuts can have unpredictable psychological effects: buyers may believe that the product is faulty or of lower quality, or will soon be replaced, or that the firm is going bankrupt, etc. Similarly, price rises convince some customers that the product must be of high quality, or will soon become very hard to get hold of, and so on!

     A psychological effect that many retailers count on is that a potential customer seeing a price of. $499 will register the $400 price range rather than the $500. This technique its known as “odd pricing”.

     Obviously most customers consider elements other than price when buying something: ‘The total cost” of a product can include operating and servicing costs, and so on. Since price is only one element of the marketing mix, a company can respond to a competitor’s price cut by modifying other elements: improving its product, service, communications, etc. Reciprocal price cut may only lead to price war, good for customers but disastrous for producers who merely end up losing money.

     Whatever pricing strategies a marketing department select, a product’s selling price generally represents its total cost (unit cost plus overheads) plus profit or “risk reward”. Overheads are the various expenses of operating a plant that cannot be charged to any one product, process or department, which have to be added to prime cost or direct cost which covers material and labour. Cost accountants have to decide how to allocate or assign fixed and variable costs to individual product, processes or department.

     Microeconomists argue that in a fully competitive industry,  price equals marginal cost equals minimum average cost equals breakeven points (including a competitive return on capital) and that a company’s maximum-profit equilibrium is where extra costs are balanced by extra revenue, in order words, where the marginal cost curve intersects th marginal revenue curve. In reality, many companies have little idea what their optimal price or production volume is, while most microeconomists are happier with their models than actually talking to production managers, marketers and cost accountants!

.7.2 According the text, are the following TRUE or FALSE?

1.  There are tree basic factors potential involved in all pricing decisions                                          TRUE

2.  When pricing a product, companies have to think of potential as wel as existing competetors     TRUE

3.  You are unlikely to sell high quality products at a low price.                                                        TRUE

4.  When demand exceeds apply, a company nearly always increases its prices.                               TRUE

5.  A company faced with rising costs has to increase its prices.                                                       FALSE

6.  A company can only change a price if it is “inelastic”.                                                                 FALSE

7.  Pricing is often strongly influenced by psychological factors                                                        TRUE

8. A company can respond to competitors’ price cut by changing different elements of the marketing mix.                  TRUE.

9.  Prices generally take into account both direct and indirect costs.                                                TRUE

10.In theory, a product’s price should equal its marginal cost and the company’s breakeven point.  TRUE

4.7.3 Word partnership from the text:

1.  breakeven point                                        6.  market share

2.  production capacity                                  7.  odd pricing

3.  distribution cost                                        8.  prime cost

4.  profits and sales targets                            9.  cost accountant

5.  market positioning                                    10.variable costs

“At the moment Mr Grilph is in one of those periods between losing and marking fortunes.”

4.7.4 The text summary:

   The most important factors in pricing decisions are production cost (including overheads), the level of demand, and the going market price. Yet broader company objectives, and profits or sales target, and market positioning, are also important. There are also lots of  circumstances that might cause companies to change their prices: excess production capacity, large inventories or a falling market share on the one hand, or cost inflation, an urgent need for cash, or demand that exceeds supply, on the order. Yet perfectly logical decisions regarding prices thought to be elastic can have unpredictable psychological effects. It is also clear that customers are influenced by elements other than price, so companies can equally modify other elements of the marketing mix. In a competitive industry, price is generally not much greater than marginal cost and breakeven point.

4.8 Pricing Strategies

1.  Market penetration pricing:

     We decided to launch the product at a very low price, almost at direct cost, hoping to get a big market share. Them we can make profits and later because of econonies of scale.

2.  Market skimming:

     We’re going to charge a really high price to start with. We can also lower it later to reach price-elastic market segments.

3.  Current-revenue pricing:

      Firstly we need cash, and secondly, we don’t  think the producer will last very long – it’s really just a gimmick – so we’re trying to maximize our sales income now.

4.  Loss-leader pricing:

     Like all supermarkets, we offer half a dozen or more different items at a really low price each week. We lose on those, but customers come in and by lots of other stuff as well.

5.  Mark-up or cost-plus pricing:

     They just worked out the unit cost and added a percentage, without even considering demand elasticity or anything like that.

6.  Going-rate pricing:

     Since our product is indistinguishable from those of all our competitors, and we’ve only got a tiny part of the market, we charge the same as the rest of them.

7.  Demand-differential pricing (or price discrimination):

     We charge lots of different prices for what is really almost the same thing. Of course, in First Class you get better food, and in Economy there’s hardly any legroom, but it still a flight from A to B.

8.  Perceived-value pricing:

     We charge an extremely high price because we know people will pay it. Our brand name is so famous for quality – we can make huge profits.