Marketing

Table of Contents

1. Topic pack - Marketing - introduction
2. 4.1 The role of marketing - notes
3. 4.1 The role of marketing - questions
4. 4.2 Marketing Planning - notes
5. 4.2 Marketing planning - questions
6. 4.3 Product introduction - notes
7. 4.3 Product - questions
8. 4.3 Product - simulations and activities
9. 4.4 Price - notes
   1. Price
   2. Summary of pricing strategies - SL
   3. Summary of pricing strategies - HL
   4. Cost-based strategies
   5. Cost-plus pricing (mark-up pricing)
   6. Marginal cost pricing
   7. Pricing - Contribution pricing
   8. Pricing - Absorption cost and full cost pricing
   9. Competition-based pricing
   10. Price leadership
   11. Predatory pricing
   12. Going rate pricing
   13. Market-based pricing
   14. Penetration pricing
   15. Skimming pricing
   16. Price discrimination
   17. Loss leader
   18. Psychological pricing
   19. Promotional pricing
   20. Supply and demand
   21. Elasticity
   22. Elasticity and sales revenue
   23. Price elasticity and the product life cycle
   24. Income elasticity of demand (YED)
   25. Cross elasticity of demand (XED)
   26. Advertising elasticity of demand (AED)
10. 4.4 Price - questions
11. 4.4 Price - simulations and activities
12. 4.4 Promotion - notes
13. 4.5 Promotion - questions
14. 4.6 Place (distribution) - notes
15. 4.7 International marketing - notes
16. 4.7 International marketing - questions
17. 4.8 E-commerce - notes
18. 4.8 E-commerce - questions
19. Printable version

Cost-plus pricing (mark-up pricing)

This is a commonly used pricing technique, because it is simple to understand and implement and it appeals to organisations which are risk-averse. Cost-based pricing is when the price of the product is decided by its costs of production. The firm calculates the average cost of production and then adds a predetermined (agreed) percentage mark-up or profit margin. If successful this will ensure a certain amount of profit per unit sold.

The exact nature of this profit mark-up will depend on the market, but as a generalisation it is likely that high volume items will have a relatively low mark-up, whereas low volume items are likely to have a higher mark-up. This percentage is often governed by a corporate strategy on what is an acceptable return on the capital invested to make the product.

Ideally the firm will attempt to maximise its Profit Margin.

A cost-based pricing strategy ignores the effect of pricing levels on demand patterns and does not take into account market conditions and the pricing strategies of competitors.

Cost-based pricing problems

The focus of cost-based pricing is internal, not based on the needs of its customers. It also ignores the competition and the nature of the demand for the product. Will the market bear this price? To price in this way is very inflexible and unresponsive to market changes. One might assume that this method guarantees a profit, but this is far from true. If the price is too high, demand will fall. This will make indirect costs per unit higher. The firm may respond to this by raising price. This will reduce demand further and so the spiral continues ........

So the key disadvantages of cost-plus pricing are:

• Lack of responsiveness to market demand (and to the price elasticity of demand).
• Difficulties with calculation of costs - in particular the indirect cost element. Which costs should be attributed to the calculation and how much of each indirect cost is arte to allocate?
• Little attention paid to any investment that has taken place or is required. How will this be funded and how will any return on capital be included in the pricing?
• Little or no account is taken of what price is being charged by competitors, which may result in under-pricing or more likely over-pricing.