MKTG3306 Lecture Notes - Lecture 8: Aldi, Leader Price, Ryanair
MKTG3306
Lecture 8: Pricing Decisions
• In 1964 marketers ranked ‘price’ as the 6th most important success factor (behind
R&D, market research, advertising etc.)
• Today price is among marketers’ No.1 concern
• Why?
1. Because price is linked to emotions
2. Powerful and accessible lever to profits
a. A price rise of 1% typically generates an operating profit of 8%
b. To double your profits, price often just needs to be increased by 9%
3. Determines whether the customer will buy the product
4. Dictates the target market
“If you’ve got the power to raise prices without losing your business to a competitor,
you’ve got a vert good business. If you have a prayer session before raising the price by
10%, you’ve got a terrible business.” Do you agree?
• I disagree. How your market reacts to a price increase depends on internal factors
(e.g. are you a cost leader or differentiator) and external factors (e.g. what are your
competitors doing)
• An increase by 10% is a lot and will lower sales volumes of most businesses
o For a cost leader ‘price’ is at the core of the business model
▪ E.g. Walmart
o Aldi signals cheap prices wherever possible
▪ E.g. Aldi
o Ryanair also does everything it can to drive down costs and offer cheap prices
o High volume low margin – bread
o Low volume high margin – luxury goods
Another important internal decision that determines pricing decisions is whether firms go
for a (1) skimming or (2) penetration pricing strategy
• Skimming – set a high price
• Penetration – very low pricing
Firms that follow a skimming pricing strategy
• Signal high quality (at a high price) and couple that with a selective distribution
strategy (i.e. disintermediation) in order to achieve high margins
• “Skim the cream off the market”
o 3M
▪ Is very innovative and launches many new products at very high
prices, once copycats push into the market
▪ Famous for making sticky notes
▪ Innovators, differentiators, set high prices, skim the market
Firms that follow a penetration pricing strategy
• Set the price low to encourage fast food adoption and discourage competitors from
entering the market
• E.g. magazines
Document Summary
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