FOUNDATIONS OF PRICING
CHAPTER 9 1. COST
pricing • cost based pricing strategy – used when
marketer sets prices by calculating cost of
PRICING producing service & then adding desired
• price is the financial medium facilitating profit mark-up to figures
exchange between service providers and their • service provider’s cost can take two forms:
customers • costs don’t change with quantity
• exchange implies that money is paid by demanded
customer to service provider in exchange for Fixed
• office equipment, buildings,
a service salaries
• exchange will only take place if buyer and
• costs change with demand
seller believe that there is sufficient value in Variable
• electricity, postage, supplies
the exchange for both
• art of successful pricing is to find price level
that is low enough to represent good value to Methods
the customers, yet high enough to allow 1. Cost-plus pricing
service to provide to realise its financial
• service organisation determines price by
objectives
adding given mark-up to their costs to
produce service
PRICING OBJECTIVES
• ignores demand and competition
used in unfavourable market 2. Rate of return pricing
conditions, where pricing objective
• overall rate of return of an organisation is
1. Survival is to attain desired levels of
profit yielded before interest and tax, divided
profitability to ensure
by total assets utilised to generate profit
organisation’s survival
3. Activity based costing
used in service industries where
• traces costs of services through all service-
2. Sales sales volume is important, by using
generating activities by analysing service
maximisation economics-of-scale benefits to
organisation’s past records to identify
gain a competitive advantage
activities required to complete specific
using high prices to position project
3. Prestige themselves as exclusive and 4. Break-even pricing
prestigious
• what sales volume should be reached before
price of services such as health total costs equal total revenue
care, electricity, and public • no profits are earned, and no losses are made
4. Social
transport is often regulated by
consideration
government and price of the 2. COMPETITION
service is usually below cost price
• competition-based pricing strategy – when
new service may have objective of marketer sets prices in accordance with
5. Stimulate
attracting new customers using those of competitors
patronage
introductory price discounts • competition occurs when same service is
to ensure maximum use of their offered at same level of standardisation and
6. Match
productive capacity at any given complexity
supply and
time, organisations try to match • when setting prices, service organisations
demand
supply and demand should focus on competitors on all levels,
and not only on their direct competitors
1
CHAPTER 9 1. COST
pricing • cost based pricing strategy – used when
marketer sets prices by calculating cost of
PRICING producing service & then adding desired
• price is the financial medium facilitating profit mark-up to figures
exchange between service providers and their • service provider’s cost can take two forms:
customers • costs don’t change with quantity
• exchange implies that money is paid by demanded
customer to service provider in exchange for Fixed
• office equipment, buildings,
a service salaries
• exchange will only take place if buyer and
• costs change with demand
seller believe that there is sufficient value in Variable
• electricity, postage, supplies
the exchange for both
• art of successful pricing is to find price level
that is low enough to represent good value to Methods
the customers, yet high enough to allow 1. Cost-plus pricing
service to provide to realise its financial
• service organisation determines price by
objectives
adding given mark-up to their costs to
produce service
PRICING OBJECTIVES
• ignores demand and competition
used in unfavourable market 2. Rate of return pricing
conditions, where pricing objective
• overall rate of return of an organisation is
1. Survival is to attain desired levels of
profit yielded before interest and tax, divided
profitability to ensure
by total assets utilised to generate profit
organisation’s survival
3. Activity based costing
used in service industries where
• traces costs of services through all service-
2. Sales sales volume is important, by using
generating activities by analysing service
maximisation economics-of-scale benefits to
organisation’s past records to identify
gain a competitive advantage
activities required to complete specific
using high prices to position project
3. Prestige themselves as exclusive and 4. Break-even pricing
prestigious
• what sales volume should be reached before
price of services such as health total costs equal total revenue
care, electricity, and public • no profits are earned, and no losses are made
4. Social
transport is often regulated by
consideration
government and price of the 2. COMPETITION
service is usually below cost price
• competition-based pricing strategy – when
new service may have objective of marketer sets prices in accordance with
5. Stimulate
attracting new customers using those of competitors
patronage
introductory price discounts • competition occurs when same service is
to ensure maximum use of their offered at same level of standardisation and
6. Match
productive capacity at any given complexity
supply and
time, organisations try to match • when setting prices, service organisations
demand
supply and demand should focus on competitors on all levels,
and not only on their direct competitors
1
