MKTG10001 Lecture Notes - Lecture 8: Predatory Pricing, Exit Strategy, Profit Margin
6 Jun 2018
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MKTG10001 - PRINCIPLES OF MARKETING
LECTURE 8 . 1 – PRICING: OBJECTIVES & TACTICS
• In the absence of value, price becomes an issue – if you ignore benefits, then you will be left to
compete based on costs (price)
• Price should reflect all other costs & benefits. Can’t set price without understanding these
Honoravium: payment based on how much the client thinks you’re worth – amount of value created
Cost-based Pricing: based on costs to produce the product. Often leads to over-pricing when demand is
low, & under-pricing when demand is high (due to scale of economies)
Competition-based Pricing: based on competitor’s prices. It assumes there are
no desperate competitors (who would drag the price down)
Customer-based (value) Pricing: important because consumers pay for value,
they don’t care what the firm’s costs are
• If value-price is below cost-price, then you need to increase value
• Should start with value-based pricing, but bear in mind that you need a profit
margin (cost-based), & that customers will frame you against competitors
• Need to understand:
• Customers’ perception of value (i.e. their willingness to pay)
• Customers’ price sensitivity (i.e. elasticity) – (diagram to right: slope
of the demand curve – relationship between demand & price)
Pricing Tactics: these allow a temporary departure from value pricing, to achieve goals such as:
• Gain market share
• Short-term profitability
• Entry deterrence (of competitors)
• Product positioning (prestige-pricing, quality-assurance pricing)
• Exit strategy (price higher as market shrinks – cater to die-hards. Price low to get out)
• Penetration Pricing: set price below value pricing level to gain market share
• Advantages: long-term profits often follow the dominant market share (loyalty), economics of
scale, may discourage new entrants
• Disadvantages: assumes there’ll be little competitive retaliation, assumes there’ll be elastic
demand growth in market share, can be difficult to raise prices subsequently
• Predatory pricing: deliberate price cutting or offer of ‘free gifts / products’ to force rivals out of
business or prevent new entrants. Is anti-competitive & illegal
• Skimming: setting a price level above the value pricing level
• Advantages: good for new / unique products (customers willing to pay more), maximises short-
run profits by selling to those customers with highly inelastic demand for the product, after this
group has purchased price can be lowered to capture the next level of demand, is consistent with
quality / prestige positioning
• Price Discrimination: charging a different price for the same good / service in different markets
(can’t be exactly the same – illegal). Should discriminate based on what different customers value
• Requires each market to be impenetrable, & different price elasticity of demand in each market.
(e.g. first class vs economy plane tickets)
• Not suitable for every market
• Stability: price relativities between competitors are maintained to preserve stability in the market
• Advantages: avoids retaliation from competitors & price wars, & competitive activity is focused
on product improvement, distribution efforts, & promotional programs
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
In the absence of value, price becomes an issue if you ignore benefits, then you will be left to compete based on costs (price: price should reflect all other costs & benefits. Honoravium: payment based on how much the client thinks you"re worth amount of value created. Cost-based pricing: based on costs to produce the product. Often leads to over-pricing when demand is low, & under-pricing when demand is high (due to scale of economies) It assumes there are no desperate competitors (who would drag the price down) Customer-based (value) pricing: important because consumers pay for value, they don"t care what the firm"s costs are: should start with value-based pricing, but bear in mind that you need a profit. Distribution (marketing) channel: network of organisations that create time (able to get it when you want it), place, & possession (facilitates possession e. g. allowing pay instalments) value for consumers.
