1003MKT Lecture 10: Week 10 Marketing Lecture Notes
30 May 2018
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Week 10 Marketing Lecture Notes
Price and Place
Factors in setting a price: Campaign/ Company goals
1. Profit: Total Revenue- Total costs (TR-TC)
→ Total revenue= price x sales volume
2. Market share: may require cutting price, or profit margin
3. Return on Investment (ROI): Based on forecast of profitability
4. Survival over the long-term
Notes from slides:
The factors to be considered in setting a price begin with the company or campaign
objectives. Pricing objectives tend to focus on various combinations of the following:
• Profit - All for-profit organisations seek to make a profit to reward the business
owners for the risk they take in investing in the business. Price is directly related to
profitability through the following relationship: profit = (price x sales volume) - total
costs. Price is a major determinant of sales volume. In turn, sales volume influences
costs, both cost per unit sold, and the production cost of each unit (ie economy of
scale). At the simplest level, prices must exceed costs.
• Return on investment or ROI is a common basis for pricing. It is used to determine
the minimum acceptable level of profitability for new products, thus ensuring that
the company invests in new ventures wisely. ROI calculations can only be based on
projections, however, of revenue and associated costs. Nevertheless, they do
provide a measure to guide pricing strategy. Companies compare ROI rates against
other alternatives in which they could invest.
• Long-term survival - Ongoing survival is a fundamental goal of all businesses and
brings a long-term perspective to the setting of pricing objectives. Well-run
businesses put their survival ahead of short-term profit considerations. The rationale
for this is simple: profitability over the long term leads to greater total wealth for
business owners than does maximising short-term profits at the expense of the
future of the business.
• Market share - Pricing objectives may be formulated to achieve particular market
share outcomes. Many businesses use aggressive pricing in an effort to increase or
defend market share.
• Positioning - Pricing is a fundamental tool of positioning. Consumers often compare
competing products based on price, and to some extent this can occur
independently of some of the other elements of the marketing mix.
Pricing objectives should adhere to the SMART framework: specific, measurable, actionable,
reasonable and timetabled.
Not-for-profit pricing - While not-for-profit (NFP) organisations do not seek to make profits,
they do seek a return on their activities. NFP pricing objectives include generating enough
funds to sustain activities, making products/activities appealing to a target market, or
encouraging a change in attitude or behaviour among a target market.
3 Bases of setting price
1. Costs
2. Demand
3. Competition
With new product launches: 2 approaches
1. Price skimming: charging the highest price that customers are willing to pay, then
lowering the price later to bring in more buyers
2. Penetration pricing: setting a low price in order to gain rapid market share and
turnover for a new product
Notes from slide:
How do you go about setting a price for your product?
There are three major bases for pricing, and all 3 must be considered in the final decision
about price. It is important to seek a price which yields a satisfactory outcome (or
compromise). That is, prices generally need to yield acceptable profit margins, appeal to
target customers and provide a competitive market offer.
1. Costs (including margins and profits)
2. Demand
3. Competition.
• Pricing new products - In settling on the launch price of a new product there are two
broad pricing strategies for new products:
➢ Price skimming - Charging the highest price that customers who most desire
the product (innovators, and early adopters) are willing to pay. Over time,
the price is lowered to bring in larger numbers of buyers, again at the highest
prices that these buyers are willing to pay. Price skimming allows an
organisation to generate cash flow quickly to offset the startup costs of
product development and launch. Price skimming also serves to temporarily
limit demand, enabling the organisation to better balance demand with
limited supply capacity. Many companies in hi-tech product categories use a
skimming strategy.
Penetration pricing - Use a low price in order to gain rapid market share and turnover and
encourage consumer trial
1. Cost based pricing
• Price floor: costs establish the price floor while a business can sell below cost for a
short time, it cannot sustain this approach in the long-term
• “loss leader”: a product priced below cost to attract customers into the store
• cost-plus or mark-up pricing: calculate the costs of add a mark-up (a percentage or
dollar amount)
Notes from slides:
• Costs establish a price floor, below which prices are not sustainable in the long-run
for a for-profit organisation. Even though a business may sell at a loss for a short
period of time (e.g. to generate cash flow, or attract customers to trial a new
product), it cannot maintain this approach.
• Pricing approaches based on costs are concerned primarily with covering costs,
achieving target profit margins and aggregate profits. In cost-based pricing, the
selling organisation adds a percentage or dollar amount to the cost of the product.
The amount added is the organisation’s profit. Cost-based pricing approaches are
usually either cost-plus pricing or mark-up pricing.
➢ Cost-plus pricing is often used when it is difficult to determine the costs of
the product until it has been completed. This is often the case for large,
complex projects such as roads, submarines and information technology
installations. In such cases, the seller adds their required profit margin as a
dollar amount or percentage to the costs once the project is complete. The
disadvantage for the buyer is that they cannot be sure of the final price they
will pay.
➢ Mark-up pricing is often used by wholesalers and retailers and involves
adding a percentage of their purchase cost to determine the resale price.
Mark-up percentages are usually fairly similar, if not standardised, within a
particular retail sector. For example, mark-up on food and groceries is about
10–20 per cent, and mark-up on high fashion is about 100 per cent. Most
retailers adopt a consistent mark-up for ease of administration. Mark-up can
be expressed in two ways: percentage of cost and percentage of selling price
(or ‘margin’). If a retailer buys a pair of jeans for $75 and sells them for $150,
the mark-up ($75) expressed as a percentage of cost ($75) is 100%. The mark-
up ($75) expressed as a percentage of selling price ($150) is 50%.
• Cost-based pricing using a mark-up is attractive in its simplicity and its guarantee
that all units sold will be profitable. However, there is no guarantee that a cost-
based pricing approach will result in a price which is competitive and which
customers are willing to pay.
• Price leaders: This approach involves pricing a small number of key, high-volume
products near or below cost. If priced near cost, the product is called a price leader;
if priced below cost, it is called a loss leader. Such pricing is designed to attract
customers into the store (to generate ‘store traffic’) where it is hoped they will also
purchase other products to offset margins in the price leader products.
Break-even analysis
• Break-even: the point at which the revenue earned from selling a product, equals
the costs of producing that product i.e. the point at which profit starts
• Used with news products/ projects to estimate the number of sales (or revenue) that
will be required to cover total
costs
Document Summary
Factors in setting a price: campaign/ company goals: profit: total revenue- total costs (tr-tc) Total revenue= price x sales volume: market share: may require cutting price, or profit margin, return on investment (roi): based on forecast of profitability, survival over the long-term. The factors to be considered in setting a price begin with the company or campaign objectives. Pricing objectives tend to focus on various combinations of the following: profit - all for-profit organisations seek to make a profit to reward the business owners for the risk they take in investing in the business. Price is directly related to profitability through the following relationship: profit = (price x sales volume) - total costs. Price is a major determinant of sales volume. In turn, sales volume influences costs, both cost per unit sold, and the production cost of each unit (ie economy of scale).
