MKTG90004 Chap.6 Pricing
Pricing
Price is unique among the Ps: every other element costs money to deliver value; price is where the firm captures it back, and a 1% price improvement typically beats a 1% volume or cost improvement on profit. Yet pricing is set by gut more than any other P, so this chapter gives the disciplined process and value logic that should drive it.
It walks the 6-step pricing process (objective → demand/ceiling → costs/floor → competition → method → final price); classifies the four pricing methods (cost / customer / market / product); distinguishes True Economic Value (TEV) from perceived value (Dolan & Gourville) and names the comms gap between them; computes a break-even; lays out the six product-mix pricing types; and adds the three levels of price management, total cost of ownership (TCO), and price customisation to capture consumer surplus — all with the fairness constraint that surge or opaque pricing draws backlash.
What this chapter covers
- 01
P1 The 6-step pricing process (the price corridor: cost floor, demand ceiling)
- 02
P2 Pricing methods — cost / customer / market / product
- 03
P3 TEV vs perceived value (Dolan & Gourville) — the comms gap
- 04
P4 Break-even analysis (units & dollars; target-volume)
- 05
P5 Product-mix pricing — the 6 types
- 06
P6–P8 Three levels of price management; TCO; price customisation & consumer surplus
Worked example: break-even and a target-profit volume
- +1Unit contribution = price − variable cost = 40 − 25 = $15 per box.
- +2Break-even (units) = fixed cost ÷ unit contribution = 60,000 ÷ 15 = 4,000 boxes.
- +1Target-volume = (fixed cost + target profit) ÷ unit contribution = (60,000 + 30,000) ÷ 15.
- +1Compute: 90,000 ÷ 15 = 6,000 boxes to make $30,000 profit.
Key terms
- The price corridor
- Costs set the floor (you won't sustain a price below cost) and demand sets the ceiling (you won't price above buyers' willingness to pay); competition and positioning choose the point between them. The 6-step process bounds the decision this way.
- Pricing methods
- Four perspectives by whose logic anchors the price: cost (cost-plus / markup), customer (perceived-value pricing), market (competition-based / going-rate), and product (product-mix pricing). Best practice anchors on customer value and uses the others as guard-rails.
- True Economic Value (TEV)
- Dolan & Gourville: the maximum a rational, fully-informed buyer should pay = reference value (price of the next-best alternative) + differentiation value ($ worth of how you differ, + or −).
- Perceived value
- What the buyer actually thinks the product is worth — usually below TEV because buyers lack full information. The gap is the communication job: marketing's task is to close it so the buyer sees the value the price reflects.
- Break-even
- The volume at which price covers all costs. Break-even (units) = fixed cost ÷ unit contribution, where unit contribution = price − variable cost. Target-volume adds the target profit to the fixed cost.
Pricing FAQ
What are the six steps of the pricing process?
(1) Define the price objective (short-term profit, market penetration, market skimming, or quality/price leadership); (2) determine demand — the ceiling, gauging price elasticity; (3) estimate costs — the floor; (4) analyse competition; (5) select a pricing method (cost / customer / market / product); (6) select the final price, layering in psychology, fairness, brand fit and the rest of the mix.
What's the difference between TEV and perceived value?
TEV (True Economic Value) is what a rational, fully-informed buyer should pay = reference value + differentiation value. Perceived value is what the buyer actually thinks it's worth, usually less than TEV because buyers lack full information. The gap is the communication job — closing it is the whole argument for value-based over cost-plus pricing.
Captive-product vs two-part pricing — how do I tell them apart?
Captive = a cheap durable plus expensive consumables repurchased over time (printer + ink; razor + blades). Two-part = a fixed access fee plus a per-use charge (gym joining fee + monthly; theme park entry + spend). If there's a consumable being rebought it's captive; if there's an entry fee plus usage it's two-part.
What is price customisation and where's the ethics line?
Charging different buyers different prices to capture more consumer surplus (the gap between willingness-to-pay and price paid) — sorting by purchase history, location, age, status, timing or quantity (the airline fare-class example). The ethics line: customisation that feels unfair (emergency surge pricing, opaque personalised prices) draws backlash, so perceived fairness is itself a pricing constraint.
Exam move
Pricing is examined as process + calculation + judgment, so practise all three.
Recite the 6 steps and the price corridor (cost floor, demand ceiling); classify a scenario's method (cost / customer / market / product); compute a break-even cleanly (unit contribution = price − variable cost; break-even = fixed cost ÷ contribution; add target profit for target-volume); distinguish TEV from perceived value and name the comms gap; and identify the product-mix pricing type from an example (watch captive vs two-part).
In Part B your ‘Price’ recommendation must name an objective (penetration vs skimming), a method, and a defensible number with a break-even sense-check — and flag the fairness constraint where surge or opaque pricing is involved.
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