MARK1012 Lecture Notes - Marketing, Pricing Strategies, Irregular Warfare
PRICING
• Price: overall sacrifice a consumer is willing to make to acquire a specific
product
• Consumers judge the benefits the product delivers against the sacrifice
necessary to obtain it, then make decision based on judgement of value
• Pricing → no costs but generates revenue
• Consumers may use money to judge the quality
o Pricing creates value
THE FIVE Cs OF PRICING
• COMPANY OBJECTIVES
o Pricing should support and allow firm to reach its overall goals
o E.g. High sales → different pricing strategy than firm with goal →
quality leader
• PROFIT ORIENTATION
o Implemented to specifically focus on target profit pricing, maximising
profits or target return pricing
▪ Target profit pricing → when have particular profit goal as
overriding concern
• Price stimulates certain level of sales at certain profit per
unit
▪ Maximising profits → model that captures all factors required to
explain and predict sales and profits
• Problem → gathering data for accurate results is difficult
• Highly accurate
▪ Target return pricing → less concern with absolute level of
profits more interested in rate at which profits are generated
relative to investments
• Designed to produce specific return on investment
(usually expressed as % of sales)
• SALES ORIENTATION
o Set prices believe that increasing sales will help firm more than will
increase profits
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o Low prices may be set to discourage new firms from entering market,
encourage current firms to leave, and/or take market share away from
competitors → GAIN OVERALL MARKET SHARE
o Premium pricing: firm deliberately prices a product above prices set for
competing
o Concept of value is implicit → for sales to increase consumers must
see greater value
• COMPETITOR ORIENTATION
o View pricing strategy according to premise that they should measure
themselves primarily against competition
▪ Competitive parity: set prices similar to those of major
competitors
▪ Status quo pricing: prices only to meet those of competiton
▪ Concept of value implicit → copying strategy might provide
value
• CUSTOMER ORIENTATION
o Sets pricing strategy based on how it can add value to its goods or
services
▪ E.g. high priced, state of the art goods in anticipation of limited
sales → enhance company’s rep and image and increase
company’s value
• CUSTOMERS
o Developed company objectives → turn to understanding consumers’
reactions to different prices
o Customers want value and price is half of the value equation
DEMAND CURVES AND PRICING
• Demand curve: how many units of a product consumers will demand at
different prices
• As demand for product decreases, price increases (usually)
• Prestige goods or services → higher the price → greater status associated →
greater exclusivity
o Higher price → sometimes greater quantity sold
o When customer value increase in presige more than the price
differential between prestige product and other products → greater
value overall
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• Price elasticity of demand
o Measures how changes in price affects the quantity of product
demanded
▪ Ratio of % change in quantity demanded to %change in price
o Generally market is price sensitive (elastic)
▪ When price elasticity < -1 (when a 1% decrease in price
produces more than a 1% increase in quantity sold)
▪ Elastic → small changes in price generate large changes in
demand
• Increase sales → lower price
o Prince insensitive (inelastic) → > -1
▪ If firm must raise prices → more helpful in such a market
▪ Lowering prices does not increase demand
o Factors influencing
▪ Income effect: change in quantity of a product demanded by
consumers due to change in income
• Increase in income → spending changes → demand
shifts from lower priced to higher priced or quantity
purchased
• Economy is good → consumers incomes are rising
overall → elasticity of high price items may drop
o Types of costs:
▪ Variable costs: primarily labour and materials → varies with
production volume
• firm produces more or less of good/service, total variable
costs increase or decrease at the same time
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Document Summary
The five cs of pricing: company objectives, pricing should support and allow firm to reach its overall goals, e. g. High sales different pricing strategy than firm with goal quality leader: profit orientation. Increase sales lower price: prince insensitive (inelastic) > -1. If firm must raise prices more helpful in such a market: lowering prices does not increase demand, factors influencing. Income effect: change in quantity of a product demanded by consumers due to change in income. Includes: rent, utilities, insurance, administrative wages, depreciation of plant and equipment: total cost: sum of variable and fixed. Contribution per unit = price variable cost per unit. To calculate target return price based on markup on cost: If channel members do not communicate pricing goals, conflict will arise: grey market: employs irregular methods legally circumvents authorise channels of distribution to sell goods at prices lower than those intended by manufacturer.
