5.1 Describe the foundations of pricing strategy
Marketing is the only function that brings operating revenues into
the organisation; all other management functions incur costs
3 Foundations:
Costs to the provider
Competitors' pricing
Value to the customer
5.2 Formulate pricing objectives
Pricing objectives:
Revenue and Profit Objectives
Gain profit
Make the largest possible long-term contribution or profit
Profit revenue minus costs
Achieve a specific target level, but do not seek to maximise profits
Maximise revenue from a fixed capacity by varying prices and
target segments over time. This is done typically using revenue
management systems e.g. ski resorts, hotels, airlines
Cover costs
Cover fully allocated costs, including corporate overhead
Cover costs of providing one particular service, excluding
overhead
Cover incremental costs of selling one extra unit or to serve one
extra customer
Patronage and User Base-Related Objectives
Build Demand
Maximise demand (when capacity is not a restriction), provided a
certain minimum level of revenue is achieved (e.g. many non-
profits are focused on encouraging usage rather than revenue, but
also have to cover costs)
Achieve full capacity utilisation, especially when high capacity
utilisation adds to the value created for all customers (e.g. a 'full
house' adds excitement to a theatre play or basketball game)
, Develop a User Base
Encourage trial and adoption of a service. Important for new
services with high infrastructure costs and membership-type
services
Build market share especially if there are a lot of economies of
scale that can lead to a competitive cost advantage e.g. cable TV
(penetration pricing); or network effects where additional users
enhance the value of the service to the existing user base (e.g.
Facebook and LinkedIn)
Strategy-Related Objectives
Support Positioning Strategy
Help and support the firm's overall positioning and differentiation
strategy (e.g. as a price leader, or portrait a premium image with
premium pricing)
Promote a "We-will-not-be-undersold" positioning, whereby a
firm promises the best possible service at the best possible rate;
wants to communicate that the quality cannot be bought at a
lower cost elsewhere
Support Competitive Strategy
Discourage existing competitors to expand capacity
Discourage potential new competitors to enter the market
Non-monetary pricing objectives
Ensure fairness, equity and affordability for the markets served
and focus on positive attitudinal and behavioural response e.g.
legal aid, aged care facilities, animal protection
5.3 Formulate pricing strategies and policies
5.4 Define and distinguish different types of costs
Role of price in marketing strategy:
Functional role - help generate sales, revenue, cash flow and profits
Strategic role - symbolise quality and value offered, to help position and
differentiate a service, to manage demand, to pre-empt competitors and
to maximise financial performance
Price Strategies:
Marketing is the only function that brings operating revenues into
the organisation; all other management functions incur costs
3 Foundations:
Costs to the provider
Competitors' pricing
Value to the customer
5.2 Formulate pricing objectives
Pricing objectives:
Revenue and Profit Objectives
Gain profit
Make the largest possible long-term contribution or profit
Profit revenue minus costs
Achieve a specific target level, but do not seek to maximise profits
Maximise revenue from a fixed capacity by varying prices and
target segments over time. This is done typically using revenue
management systems e.g. ski resorts, hotels, airlines
Cover costs
Cover fully allocated costs, including corporate overhead
Cover costs of providing one particular service, excluding
overhead
Cover incremental costs of selling one extra unit or to serve one
extra customer
Patronage and User Base-Related Objectives
Build Demand
Maximise demand (when capacity is not a restriction), provided a
certain minimum level of revenue is achieved (e.g. many non-
profits are focused on encouraging usage rather than revenue, but
also have to cover costs)
Achieve full capacity utilisation, especially when high capacity
utilisation adds to the value created for all customers (e.g. a 'full
house' adds excitement to a theatre play or basketball game)
, Develop a User Base
Encourage trial and adoption of a service. Important for new
services with high infrastructure costs and membership-type
services
Build market share especially if there are a lot of economies of
scale that can lead to a competitive cost advantage e.g. cable TV
(penetration pricing); or network effects where additional users
enhance the value of the service to the existing user base (e.g.
Facebook and LinkedIn)
Strategy-Related Objectives
Support Positioning Strategy
Help and support the firm's overall positioning and differentiation
strategy (e.g. as a price leader, or portrait a premium image with
premium pricing)
Promote a "We-will-not-be-undersold" positioning, whereby a
firm promises the best possible service at the best possible rate;
wants to communicate that the quality cannot be bought at a
lower cost elsewhere
Support Competitive Strategy
Discourage existing competitors to expand capacity
Discourage potential new competitors to enter the market
Non-monetary pricing objectives
Ensure fairness, equity and affordability for the markets served
and focus on positive attitudinal and behavioural response e.g.
legal aid, aged care facilities, animal protection
5.3 Formulate pricing strategies and policies
5.4 Define and distinguish different types of costs
Role of price in marketing strategy:
Functional role - help generate sales, revenue, cash flow and profits
Strategic role - symbolise quality and value offered, to help position and
differentiate a service, to manage demand, to pre-empt competitors and
to maximise financial performance
Price Strategies:
