MKTG10001 Lecture Notes - Lecture 7: Cash Flow, Profit Margin
6 Jun 2018
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MKTG10001 - PRINCIPLES OF MARKETING
LECTURE 7 . 2 – PRICING: CONSUMER PERCEPTIONS & BEHAVIOUR
• Price is often ‘left to the market’, but businesses should get the right price, & then leave it alone
• Too low a price: don’t make enough profit margin – go out of business
• Too high a price: damages value perception
Why Price Appeals are so common:
• They’re easier to communicate
• Price changes are more immediate & direct
• Short lead times for policy change
• No initial negative cash flow (unlike product development, advertising)
Limitations of Price Appeals:
• Competitors can react more readily to price appeals than appeals based on product augmentations
(easy to copy, then it’s no longer effective)
• While there’s no initial negative cash flow when reducing the price, in the long term even a small
decrease can lead to lots of lost profit
Profit Formula: Profit = (Price – Cost) x Unit Sales
What Price means to a Consumer: money, time, behavioural effort (location, number of things to do to
get it, accessibility of info), & cognitive activity (how easy it is to understand)
• Customers manage cognitive activity through: applying heuristics (decision rules), brand loyalty,
evoked sets, & reference groups / family
• Businesses can use these to reduce cognitive activity & therefore reduce price, through
customised messaging, endorsements, refer a friend scheme, etc.
How consumers process Price Information:
• High Involvement Products: price is more important – financial / quality considerations
• Comprehension: interpretation & assignment of meaning for the price
• Quality Assurance Pricing: price communicates the extra effort expended to produce a
superior product that will perform to the customer’s satisfaction
• Particularly effective pricing strategy where: product performance varies (services),
credence goods, & costs of product failure / poor performance are high
• Prestige Pricing: ownership of high priced products signals group membership
• Integration: compare with other information & prices of different products
• Prospect Theory: consumers don’t understand prices in terms of absolute wealth, but of
losses or gains relative to a reference point (‘framing effects’)
• Price Framing:
• Reference Pricing: a choice looks more attractive next to a costly alternative than it
does in isolation (Isolation effect)
• Placing a ‘regular’ sticker price next to sale price frames the price
• Offering an ‘inferior’ alternative positively frames the premium package
(e.g. Online $59. Print $125. Print + online $125)
• Can make references based on arbitrary relationships (e.g. wine vs temperature)
• Attitude formation
• Low Involvement Products: provided a product’s price falls within an implicit price range, it likely
won’t be evaluated as a purchase criteria – price not a key consideration
• Brand Loyal Consumers: likely purchase on the basis of the brand name – price is less relevant
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