MKTG1001 · Marketing Principles
Pricing Strategy
Pricing Strategy covers the only marketing-mix element that earns revenue. It teaches the roles of price, the price floor (costs) and ceiling (customer-perceived value), the three pricing strategies (customer value-based, cost-based, competition-based), cost-plus and breakeven, new-product pricing (skimming vs penetration), product-mix pricing, price-adjustment strategies, and elasticity and market structures.
This is Week 11 (Chapter 9) and is on the examinable final. It is the unit's only quantitative content — a simple cost-plus markup and a breakeven calculation, in Unicode arithmetic, no statistics. Part B questions ask you to recommend a pricing strategy and justify it. The figures to know are the price floor/ceiling band and the breakeven chart.
What this chapter covers
- 01The roles of price: the only mix element that earns revenue; the most flexible element; direct impact on the bottom line
- 02Price floor (costs — no profit below) and price ceiling (customer-perceived value — no demand above)
- 03The 3 pricing strategies: customer value-based (start with the customer), cost-based (start with the product), competition-based (start with the market)
- 04Cost-based: fixed + variable = total cost; cost-plus (markup) pricing; breakeven / target-return pricing
- 05New-product pricing: market-skimming (high price, willing payers) vs market-penetration (low price, fast share)
- 06Product-mix pricing: product-line, optional-product, captive-product, by-product, product-bundle
- 07Price-adjustment strategies: discount/allowance, segmented, psychological, promotional, geographical, dynamic, international
- 08Demand and price elasticity (elastic vs inelastic); market structures (pure/monopolistic competition, oligopoly, monopoly)
Cost-plus markup and breakeven (the only maths) — short-answer
- 3 marks(a) Apply the markup. Selling price = cost × (1 + markup) = $32 × (1 + 0.50) = $48. Gross profit per unit = $48 − $32 = $16.
- 2 marks(b) Find the contribution per unit. Contribution = price − unit variable cost = $48 − $32 = $16 per unit. (Here the buy cost is the variable cost.)
- 3 marks(b) Breakeven volume. Breakeven units = fixed costs ÷ contribution = $18,000 ÷ $16 = 1,125 units.
- 2 marks(b) Target-return volume. Units for a target profit = (fixed costs + target profit) ÷ contribution = ($18,000 + $4,000) ÷ $16 = $22,000 ÷ $16 = 1,375 units. Conclude: cost-plus is simple and covers costs but ignores demand and competitors.
Key terms
- Price floor and ceiling
- The price floor is set by costs — below it there is no profit. The price ceiling is set by customer-perceived value — above it there is no demand. The firm prices somewhere between the two, guided by competitors' prices and other internal and external factors.
- The three pricing strategies
- Customer value-based pricing starts with the customer's perceived value and sets price to match it (good-value or value-added). Cost-based pricing starts with the product, adds a markup to cost. Competition-based pricing starts with the market, setting price relative to rivals. The course favours starting from value.
- Cost-plus (markup) pricing
- Adding a standard percentage markup to the unit cost to set the selling price: selling price = cost × (1 + markup%). Simple and ensures costs are covered, but it ignores demand and competitor prices, so it should be checked against value and the market.
- Breakeven / target-return pricing
- Breakeven volume = fixed costs ÷ (price − unit variable cost) — the units needed to cover all costs. Target-return volume = (fixed costs + target profit) ÷ (price − unit variable cost). The denominator (price minus unit variable cost) is the contribution per unit.
- Skimming vs penetration pricing
- Market-skimming sets a high launch price to skim revenue from segments willing to pay, favoured when demand is inelastic, the brand is strong/differentiated and rivals are few. Market-penetration sets a low launch price to win share fast, favoured when demand is elastic, competition is strong and distribution is ready.
- Price elasticity of demand
- How much quantity demanded responds to a price change. Demand is elastic when a small price change causes a large quantity change (price cuts can raise revenue) and inelastic when quantity barely moves (a higher price can raise revenue). Elasticity guides whether skimming or penetration fits and is shaped by the market structure.
Pricing Strategy FAQ
Is there much maths in MKTG1001 pricing?
Very little. The only calculations are a cost-plus markup (selling price = cost × (1 + markup%)) and a breakeven/target-return volume (fixed costs ÷ contribution per unit, where contribution = price − unit variable cost). There is no statistics, calculus or probability — it is plain arithmetic. The conceptual content (the three strategies, floor/ceiling, skimming vs penetration, elasticity) carries far more marks than the two formulas.
What are the three pricing strategies and which does the course favour?
Customer value-based pricing (start with the customer's perceived value), cost-based pricing (start with the product's cost and add a markup) and competition-based pricing (start with what rivals charge). The course favours starting from customer value, because cost-based pricing ignores what customers will actually pay and competition-based pricing can trigger price wars. In practice firms triangulate: value sets the target, cost sets the floor and competition sets a reference point.
When should a new product be skimmed versus penetration-priced?
Skim (high launch price) when demand is high and inelastic, the product is genuinely differentiated, the brand is strong and there is pre-launch buzz, few rivals and high R&D to recoup. Use penetration (low launch price) when demand is elastic, strong competitors already exist and distribution is ready to scale. A common path is to skim at launch to recoup development and signal quality, then move toward penetration as rivals copy the feature and you defend share.
What are the price floor and price ceiling?
The price floor is the lower bound set by costs — price below it and you make no profit. The price ceiling is the upper bound set by customer-perceived value — price above it and there is no demand. The firm sets the actual price somewhere in the band between them, nudged by competitors' prices and other factors. Pricing on value pushes toward the ceiling; cost-plus anchors near the floor.
Exam move
Split your revision into concept and calculation. For concepts, memorise the floor/ceiling band, the three pricing strategies and their starting points, skimming vs penetration with the conditions that favour each, and the five product-mix pricing types — these carry the most marks. For the maths, drill the cost-plus formula and the breakeven/target-return formula until you can write them in symbols and substitute fast; remember contribution = price − unit variable cost. Be ready to draw the price floor/ceiling band and the breakeven chart. In Part B, recommend a strategy, justify it with the conditions, and close by naming cost-plus's blind spot (it ignores demand and competitors) for the evaluation marks.
