7.5.1 Cost-oriented price setting
The ratio of fixed to variable costs of the firm is pivotal to its pricing strategies. If a business has high fixed costs relative to variable costs, the additional sales volume increases profit. The firm is said to be volume-sensitive , as are shipping companies, which explains their use of discounts.
If a firm has high variable costs relative to its fixed costs, then it is price-sensitive , for the slightest increase in price increases profit. If economies of scale are possible, then the strategy should be one of increasing market share using prices based on anticipated lower costs of higher production levels. If the firm is a low-cost producer relative to its competitors, it can either afford to lower prices or match high prices while promoting aggressively.
Consider this
Which price-strategy have the national shipping lines of South-East Asia been using?
To gain a full understanding of cost approaches such as mark-up pricing, average cost pricing, break-even analysis and marginal analysis, you need to be familiar with demand and cost curves, price elasticity and other economic principles. Your text will explain all of these. The article by Haines (2001, p. 30) is useful because it provides an excellent overview of a variety of marketing concepts; note how the article suggests how pricing is 'a surprisingly neglected marketing issue'.
In your text
Kotler et al. (2004) Chapter 13, pp. 485-487, 'Costs' to the end of 'Costs as a function of production experience', pp. 494-497, 'General pricing approaches' and 'Cost-based pricing'.
Reading 7.2
Haines, G. 2001, 'Let's talk about price', Marketing & eBusiness , August, pp. 30, 32-33.
Activity 7.3
Review the previous reading on cost-oriented price setting.
- Write one page which explains the advantages and limitations of each of the cost-oriented approaches.
- Write another page to explain which approach you would prefer to use to set prices and why?
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