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

Marginal cost pricing

One variation of cost-based pricing is to price a product according to its marginal cost.

Marginal cost focuses on variable or marginal cost (rather than indirect/fixed costs), such as wages and raw material costs. It ignores any indirect/fixed costs in relation to the product, such as rent or interest payments.

If the price is set higher than the marginal costs the surplus can be used to pay off the fixed costs. Once the fixed costs are paid, this surplus will become profit, so any price higher than the marginal cost will be profitable for the firm.

Marginal cost pricing is likely to be most appropriate where demand fluctuates considerably - perhaps, for example, where demand is seasonal or varies according to time of day. Marginal cost pricing is frequently used by utilities and public services.

Advantages and disadvantages of marginal cost pricing

Advantages

• It is a relatively simple pricing method - quick to calculate and easy to implement
• Can help to smooth fluctuations in demand.
• It can be very useful where the firm has spare capacity and may not be able to put its resources to other, perhaps more profitable, uses.
• Can be a useful way to attract other different market segments into the market e.g. low peak train travellers may be attracted by lower prices and only travel during the day because of low prices - they may not otherwise have travelled.
• Can be a good way to remain in business and price-competitive in a time of difficult trading. Prices can then be raised later when the economic situation improves.

Disadvantages

• Not sustainable as a long-term pricing strategy as the firm will need to recover the full costs of production.
• Can result in lower price expectations and make it more difficult to raise prices again at a later stage.
• If markets are not fully separated then there can be leakage between the markets with different prices. Customers who might have paid a higher price may take advantage of the lower marginal cost price.