MKTG101

Week 08
Price
Week 8: Price

Learning objectives:

• understand the objectives that guide pricing strategies

• analyse demand to inform the development of an
appropriate pricing strategy
• describe the principles of pricing based on costs
• explain the role of competitive analysis in determining
pricing
• appreciate the issues involved in pricing for business
markets
• understand how to manage prices as part of the marketing
mix.
Introduction

(From the Marketer’s Perspective)

• “Everything is worth what its purchaser will pay for

it.” (Publilius Syrus, first century BC)
• “ A cynic knows the price of everything but the
value of nothing” (Oscar Wilde “The Importance of
Being Ernest”)
• “If you have to ask the price, you can’t afford it.”
(Rolls Royce)
• “You only get what you pay for.” (Anonymous)
Price

• Management of Price is called Pricing and is based on overall

organisational objectives.

• Price is a measure of value to both buyers and sellers. Buyers

see price as a measure of benefit, sellers need prices to cover
costs and provide profits.

Price is directly related to profitability:

• Profit = (price x sales volume) ‐ total costs
Price is a major determinant of sales volume. In turn, sales
volume influences costs, both per unit sold, and the
production cost of each unit.
https://businesstown.com/articles/how-to-price-your-products-for-insanely-
big-profits/
“If you have to ask the price, you can’t afford it.” (Rolls Royce)
 Pricing benefits

Buyer’s benefit
• Satisfaction derived from the consumption or ownership of the
product.

Seller’s benefit
• The revenue the sale derives.

• Customers interpret price differently:

• Some are motivated by higher prices, believing that these
reflect higher quality of product (price seeking)
• Others seek lower prices for greater value (price aversion)
Price should align with value
 Pricing objectives

• Pricing objectives tend to focus on various combinations of

the following issues:

• profitability
• long‐term prosperity
• market share
• positioning

• The key marketing question is what the

customer is prepared to pay
• https://www.youtube.com/watch?v=Su0PaBtNmqM
 Pricing and the law

• Pricing includes areas subject to legal restrictions:

• misleading and deceptive conduct
• price collusion
• price discrimination geographic
• comparability and clarity of pricing cars and ‘on road price’
• Governments sometimes intervene in markets to control prices
• medical care PBS
• essential services electricity, public transport
• Trade Practices Act (Australia) and Fair Trading Act (NZ) prohibit
deceptive advertising. Comparison discounting – RRP and ‘sale
price’
https://www.domain.com.au/news/under
quoting-reforms-six-changes-that-will-
affect-buyers-and-sellers-20151204-glfnaf/
Pricing decisions

• Pricing decisions should be based on an understanding of the

customer and should reflect the value of the product to the
customer.

• Pricing decisions need to consider internal organisational

factors and external environmental factors.

• Prices generally need to appeal to target customers, yield

acceptable profit margins and provide a competitive market
offer.
• https://www.youtube.com/watch?v=Lohi7binhYE
Pricing: “the art of compromise”

Customer
(1)

Compromise

Costs Competition
(2) (3)
1. Customer Demand

Demand
The relationship between the price of a particular product and
the quantity of the product that consumers are willing to buy.

Demand‐based pricing
•An approach to pricing in which prices are set based on the
level of demand in the market.
•Success depends on organisation’s ability to predict fluctuations
in demand.
• Airlines – high, low and shoulder season pricing; first,
business and economy.
• Price elasticity of demand; price sensitivity
The demand curve

Table 8.1
Figure 8.1
 Elasticity of demand

Price elasticity of demand

• The sensitivity of quantity demanded to changes in price.

Price Elasticity of Demand (ed) =

Percentage change in quantity
demanded
Percentage change in price

Influences on elasticity:
• Availability of substitute products
• Price of item relative to incomes
• Whether price change is perceived as temporary or
permanent (eg “Closing Down”, Christmas, EOFY sales)
Price Elasticity
Price elastic
• Demand for which price
elasticity is greater than 1 (i.e.
the percentage change in
quantity demanded exceeds the
percentage change in price).
Price inelastic
Demand for which price elasticity is
less than 1 (i.e. the percentage
change in quantity demanded is
less than the percentage change in
price).
19
Price-Demand
Relationship
for Prestige
Products

20
The psychology of pricing

• Consumer purchasing behaviour is usually based on a rational

evaluation of value.
• The relative importance of price varies between individual
customers, market segments and product categories.
• Psychological pricing – An approach to pricing that attempts to
influence how buyers perceive prices
• E.g. ’trigger point’ ‐ $99.95 may psychologically be significantly
more attractive than $104.95 to certain market segments
• Perceptions of price also vary with time, especially over
economic cycles between booms and recession.
• https://www.youtube.com/watch?v=yiYvUqCpu‐k
Price perceptions

Table 8.2
Price perceptions cont.
Pricing: “the art of compromise”

Customer
(1)

Compromise

Costs Competition
(2) (3)
2. Costs

The cost mix includes:

• Fixed costs – Do not vary with changes in output
• Variable costs – Do vary with changes in output
• Marginal costs – Variable costs expressed in cost per extra
unit of production
• Shared costs – Costs shared across products and functions
• Advertising, selling, distribution, R&D costs
Price floor
• A minimum price that must be charged to cover costs.
• While a business may sell at a loss for a short time (e.g., to generate
cash flow, attract customers to trial a new product, etc.), it cannot
maintain this approach.
• Low prices may generate high sales volume, but may conflict with
high‐quality, differentiated positioning.
Leaders

Price leader
• A high‐volume product priced near cost to attract customers
into the store, where it is expected they will buy other,
normally priced, products.
• Coca‐cola

Loss leader
• A high‐volume product priced below cost to attract customers
into the store, where it is expected they will buy other,
normally priced, products.
• Milk, bread, bananas
 Cost considerations

• Evaluating cost structure requires a detailed understanding of

relationships between price, demand and costs, and the link to
profits. Two useful approaches:
• Break‐even analysis
An analysis designed to estimate the volume of unit sales
required to cover total costs.
Important to test price and volume sensitivity.
Price elasticity
• Contribution margin
The difference between the price and the variable cost per
unit.
Example: Selling Price = $15
Variable Costs (materials, packaging)=$7
Contribution Margin: $15‐$7=$8 per unit
Amount per unit sold that contributes to offsetting fixed costs and,
once b/e point has been reached, contributes to profits
 Break-even

1. BLUE: Cost
2. GREEN: Revenue

Figure 8.5
Margins

Marginal analysis
• An analysis designed to determine the effect on costs and
revenue when an organisation produces and sells one more
unit of product.
• As long as additional revenue earned from selling one more unit > the
cost of supplying that unit, then that single sale contributes positively to
organisation profits
• Costs must be examined in terms of:
• average cost (total cost divided by volume of production) and
marginal cost (cost to produce and sell one more unit of
output)
• Revenue must be examined in terms of:
• average revenue (total revenue/units) and marginal
revenue.
Cost-plus pricing

• Cost‐plus often used when difficult or impossible to

determine costs of product until it has been completed
• Often the case for large, complex projects – i.e. roads,
defence submarines and IT installations
• Seller adds their required profit margin as $ or % amount to
costs once project completed
• Disadvantage to buyer – they cannot be assured of the final
price they will pay

• Example: Cost =$100 + 10% (profit)= $110

 Mark-up Pricing

• used by wholesaler and retailers – involves adding a % of

purchase cost to determine resale price
• Usually similar/standardised within a particular retail sector
• E.g. food and groceries about 10 – 20 %
• high fashion about 100%
• can be expressed as percentage of cost and percentage of
selling price (or margin)
• If retailer buys a pair of jeans for $75 and sells them for
$150, then mark‐up is ($75) expressed as a percentage of
cost ($75), is 100%
• Mark‐up (margin) ($75) expressed as a percentage of selling
price ($150) is 50%
• Examples: Cost=$10 + 50% (mark‐up)= $15
Cost=$100 + 50% (margin)= $200
Pricing: “the art of compromise”

Customer
(1)

Compromise

Costs Competition
(2) (3)
 3 Competition

• Competition‐based pricing
• Prices based on the prices charged by competitors or on the
likely response of competitors to the organisation’s prices.
• Usually when offerings are not significantly differentiated in minds of
consumers – will go for lowest price

• Undesirable unless seller has a cost advantage arising through:

• Economies of scale: As the amount of units produced
increases, the cost to produce each unit decreases. Or in
purchasing – Bunnings

• Low‐cost production: Often based on country of origin cars

produced in Asia cheaper than Australia; clothing, etc.
 Competition considerations

• Price competition can result in price volatility, (e.g.

petrol retailing)
• ‘Price wars’ can break out as competitors try to match
the low prices. This can ultimately force weaker
competitors from the market.
• Therefore a difficult strategy to sustain over
long term unless organisation has distinct
market or cost advantages
• In developed economies, long‐term price competition
can create oligopolies.
Competition considerations

• Oligopoly:
• market dominated by a small number of large suppliers.
Tend to compete on a non‐price basis through service quality, customer
relationships or branding e.g. Supermarkets; concrete, steel, banks
• Monopoly:
• one supplier who can determine price without regard for
competition, i.e. electricity and gas markets.
• Perfect competition
• A large number of buyers and sellers for undifferentiated
(commodity) products.
• Monopolistic competition
• numerous competitors whose product offerings are
differentiated by design, quality, brand image and
product features.
Avoiding price competition

• Non‐price competition
• An approach to competition based on factors other than price; that is,
based on differentiation of product, promotion and distribution.
• Organisations differentiate by product attributes (e.g. product quality,
innovation, brand image, customer service).
• Product quality – Lexus
• Innovation – Sony
• Brand Image – Apple
• Customer service – Emirates
• Distribution coverage – Woolworths
• Local convenience – Mitre 10
• Non‐price competition (differentiation) can build loyalty among
customers, which can insulate organisation from competitors’ price offers.
• Differentiation needs to be substantial, recognised and valued by customers
and cannot be easily replicated by competitors
Non-price competition

• Organisation differentiate itself from

competition by unique product attributes:

Tivoli
Business-to-business pricing

Business markets
•Buyers purchase products for use in the production of
other products, for resale, or for use in daily business.
•Business‐to‐business marketing relationships between
suppliers and organisational buyers tend to be close,
long‐term and formal in nature.
•Pricing is more complex in business markets.
•Differences in size of purchases, frequency of purchases, geographical
factors, costs involved in warehousing and transportation, etc.
•Often require sellers to adjust prices for individual customers and individual
transactions
 Pricing new products

Consider costs, demand and competition.

Two broad approaches:
Penetration pricing
• A pricing tactic based on setting a low price in order to
gain rapid market share and turnover for a new product.

Price skimming
• Charging the highest price that customers who most
desire the product are willing to pay, and then lowering
the price to bring in larger numbers of buyers.
Which is better depends fundamentally on the shape of
the demand curve (ie elastic or inelastic)
 Summarising pricing alternatives
The three c’s model for price setting

Going Rate
Price

Low Price Costs Competitors’ Customers’ High Price

prices and assessment
No possible prices of of unique No possible
profit at substitutes product demand at
this price features this price

Discretionary price range

 T76

Setting a final price

1. Selecting the pricing
objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’
costs, prices, and offers

5. Selecting a pricing
method

6. Selecting final price

Summary

Learning objectives:

• understand the objectives that guide pricing strategies

• analyse demand to inform the development of an
appropriate pricing strategy
• describe the principles of pricing based on costs
• explain the role of competitive analysis in determining
pricing
• appreciate the issues involved in pricing for business
markets
• understand how to manage prices as part of the marketing
mix.