MKTG3306 Lecture Notes - Lecture 8: Aldi, Leader Price, Ryanair

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4 Sep 2018
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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
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