MKB1700 · Fundamentals Of Marketing
Pricing
Price is the one P that brings revenue in — everything else spends it — and it is the visible expression of the value being exchanged, reconnecting to the cost/sacrifice side of customer value. The chapter starts from pricing objectives and the four price influences, then works through the company-side arithmetic the exam wants: costs split into fixed, variable and total, then cost-plus (build a price up from unit cost plus a mark-up) and break-even (the volume that covers all costs). It then flips to the customer-led approach the unit favours — value-based pricing, which sets price on the buyer's perceived value (the ceiling) with cost as the floor, tying straight back to STP and positioning. New-product strategy contrasts price skimming (start high) with penetration (start low to win share). The chapter closes with product-mix pricing (bundle, captive, by-product, optional, line) and psychological / adjustment pricing, with the ACCC and the Competition and Consumer Act setting the legal frame.
What this chapter covers
- 01Pricing objectives & the four price influences
- 02Fixed, variable & total costs
- 037.3 Cost-plus pricing (mark-up)
- 04Break-even analysis
- 057.6 Value-based pricing (ceiling & floor)
- 06Price skimming vs penetration
- 077.8 Product-mix & adjustment pricing
Worked example: cost-plus, break-even, and the value ceiling
- +1(a) Cost-plus price: price = unit (variable) cost + mark-up = $6 + $4 = $10 per unit.
- +1(b) Contribution per unit: price − variable cost = $10 − $6 = $4 covers fixed costs.
- +1(b) Break-even quantity: fixed costs ÷ contribution = $40,000 ÷ $4 = 10,000 units.
- +1(c) The ceiling: the buyers' perceived value caps the price — no one pays more than they think it is worth, however high the cost.
- +1(c) Favoured approach: value-based pricing — set price from perceived value (value → price → cost), which ties back to STP and positioning.
Key terms
- Cost-plus pricing
- The simplest pricing method: work out the unit cost, then add a mark-up. Common at the introduction stage of the life cycle where there is little market data. It runs cost → price → value.
- Break-even analysis
- Finding the sales volume at which total revenue exactly covers total costs: break-even quantity = fixed costs ÷ contribution per unit, where contribution = price − variable cost. Below it the firm makes a loss; above it, a profit.
- Value-based pricing
- Setting the price on the buyer's perceived value rather than on cost, flipping the logic to value → price → cost. The approach the unit favours because it is customer-led and ties straight back to STP and positioning.
- Price skimming
- A new-product strategy of starting with a high price to skim maximum revenue from buyers willing to pay most, then lowering it over time. Contrasts with penetration pricing (start low to win share fast).
- Product-mix pricing
- Pricing items in a range in relation to each other, not in isolation: product-bundle, captive-product (cheap core, profitable consumables like printer and ink), by-product, optional-product and line pricing (price steps across a range).
Pricing FAQ
What is the difference between cost-plus and value-based pricing?
Cost-plus builds the price up from cost — work out unit cost, add a mark-up — so it runs cost → price → value. Value-based pricing flips the logic: it sets the price on the buyer's perceived value (value → price → cost). The unit favours value-based pricing because it is customer-led and ties back to STP and positioning; cost-plus ignores what the buyer will actually pay.
How do you calculate break-even?
Break-even quantity = fixed costs ÷ contribution per unit, where contribution per unit = price − variable cost. It is the sales volume at which total revenue exactly covers total costs — below it the firm loses money, above it the firm profits. The exam wants the arithmetic tidy, so identify fixed costs, the per-unit price and the per-unit variable cost first.
What sets the ceiling and the floor on price?
The buyers' perceived value sets the ceiling — no one pays more than they think a product is worth, however high its cost. Cost sets the floor — price below cost loses money. Value-based pricing works from the ceiling down; cost-plus works from the floor up.
What is the difference between price skimming and penetration?
Both are new-product pricing strategies. Skimming starts the price high to capture maximum revenue from buyers willing to pay most, then lowers it over time (suits a distinctive, hard-to-copy product). Penetration starts the price low to win market share quickly and discourage rivals (suits price-sensitive, easy-to-copy markets).
Exam move
Price is the most calculation-heavy topic, so drill the arithmetic until it is automatic: cost-plus (unit cost plus mark-up) and break-even (fixed costs over contribution per unit). Then learn the conceptual flip — cost-plus runs cost → price → value, value-based pricing runs value → price → cost — and be ready to say why the unit favours value-based pricing (it is customer-led and ties to positioning). On your concept map, link Price both back to the cost/sacrifice value type and forward to positioning (a high price can signal premium value). Keep the ceiling/floor rule and the skimming-vs-penetration contrast as one-liners.
