Marketing – PRICE Comprehensive Study Notes

Price: Core Ideas

• Second of the 4 Ps; directly affects revenue, consumer behaviour, and the other Ps (product, place, promotion).

• Three fundamental building blocks of any price:

  • Cost of the goods (COGS)

  • Overhead (cost of doing business)

  • Desired/required profit margin

• Students asked to recall purchases driven "solely" by price and analyse why.

Determining the Cost of Goods (COGS)

• Starts with the producer’s cost (e.g., a farmer’s cost to grow wheat).

• Ingredient costs fluctuate with $\text{Supply} \leftrightarrow \text{Demand}$.

• Complexities when multiple ingredients are combined (egg-sandwich example):

  • Eggs: $\$2.40/12 = \$0.20 \text{ each}$

  • Bread: $\$3.60/20 = \$0.18 \text{ per slice} \Rightarrow 2\text{ slices}=\$0.36$

  • Margarine: $\$0.03$

  • Salt & pepper: $\$0.01$

  • Total COGS: $(0.20+0.36+0.03+0.01)=\$0.60$

• Importers & intermediaries add:

  • Freight, duties, their own markup

  • Example: manufacturer sells cereal $=\$2$ → importer $=\$3$ → retailer $=\$5\text{–}6$.

• Quantity discounts & payment terms lower effective cost for big retailers (e.g., 10 % off, free shipping, 90-day terms, short-term investment income > $\$3,000$ on 2 %/60 days).

• Pam’s candle inventory dilemma illustrates economies of scale:

  • 1 dz: $12+6=\$18$ (\$1.50 / unit)

  • 12 dz: $129.60+48=\$177.60$ (\$1.23 / unit)

  • 144 dz: $1,296+0=\$1,296$ (\$0.75 / unit)

Overhead (Cost of Doing Business)

• Separate from COGS: salaries, rent, utilities, telecom/Internet, insurance, advertising, interest, taxes, daily expenses.

• Must be covered before profit exists; influences markup policies.

Profit & Mark-Up Mechanics

• Markup: amount added to cost price to reach selling price.

• Retail example (100 % markup):

  • COGS $=\$20$ → selling price $=\$40$.

  • Overhead allocated $=\$17.50$.

  • Profit formula: $\text{Profit}=\text{Revenue}-\text{COGS}-\text{Overhead}$

  • $\$40-\$20-\$17.50=\$2.50$ → $\dfrac{2.50}{40}\times100 = 6.25\%$ margin.

  • Annual illustration: $800{,}000 \times 6.25\%=50{,}000$ profit.

• Improve profit by:

  • Reducing overhead

  • Increasing selling price (if market allows)

Demand Fundamentals

• Demand = quantity consumers desire & can buy at a given price.

• Law of Demand: inverse relationship; demand curve slopes downwards.

• Durable, predictably produced items (e.g., canned goods) often show stable prices; volatile goods (gas) fluctuate.

• Price sensitivity:

  • Commodities consumed constantly (fuel, beverages) highly sensitive → small price cuts cause big demand spikes.

  • Luxury or occasional goods less sensitive unless change > $\$2\text{–}3$.

  • Industrial inputs extremely sensitive; $0.01\$/kg$ could save $52,000/yr$.

Supply Fundamentals

• Supply = quantity firms willing & able to offer across a price range.

• Law of Supply: direct relationship; supply curve slopes upward.

• Influencing factors:

  • Capacity (Beaded Dreams can’t mass-produce handmade kits)

  • Shortage of inputs (e.g., abalone shells) raises cost & price.

  • Technological improvements lower cost → larger supply at same price.

  • Volume strategies: lower price + huge volume can out-profit higher price + low volume:

  • $1{,}000{,}000 \times \$2 = \$2\text{M}$ vs $50{,}000 \times \$6 = \$0.3\text{M}$.

  • Loss-leader or break-even tactics used to maintain market or sell complements (e.g., consoles vs games; burgers + fries).

Interaction of Supply & Demand

• Cyclical shortages/surpluses (sugar → chocolate chain).

• Equilibrium Point: $Q<em>S = Q</em>D$ at price $P^*$; market clears, no waste.

Price Factors vs Non-Price Factors of Demand

• Price factors:

  • Overall price level, price position relative to alternatives, price of related goods (substitutes/complements).

• Non-price factors:

  • New technology (DVDs → CDs → streaming)

  • Advertising & promotion (creates perceived value, shifts curve right)

Key Pricing Policies & Tactics

• Price Skimming: launch high, drop later (Blu-ray started >\$600 → < $\$100$).

• Loss Leader Pricing: sell below cost to lure traffic; risk of “bait-and-switch.”

• Price Lining: limited set of price points ($\$30,\$50,\$70$ dress racks).

• Everyday Low Pricing (EDLP): constant low price promise; use price-match guarantees (e.g., Lowe’s – extra 10 % off competitor).

• Upsizing: encourage larger size for slightly higher price; relies on elevated small-size price.

• Negotiated Pricing: haggling (homes, cars, open-air markets); uncommon in most Canadian retail.

• Interest-Free Pricing: 0 % financing on big-ticket items; saves $≈\$1,500$ on a $\$30,000$ car at 5 % standard rate.

• Combo Pricing / Bundling: discount for buying set (burger + fries + drink $=\$5.99$ vs items $\$7.00$); also cable + internet + phone.

• BOGO (Buy-One-Get-One): perceived 50 % off; actual saving example:

  • Two $\$20$ books: one half-price → pay $\$30$; saving $\$10$ or $25\%$, not 50 %.

• Psychological Pricing:

  • $\$399$ viewed as “$300-range,” seems far cheaper than $\$400$ (only $\$1$ apart).

  • Even-dollar pricing ($\$20$) used by upscale stores to avoid “cheap” perception.

Price & The Marketing Mix

• Product: price influences quality cues, positioning (luxury vs bargain).

• Place: high price can limit distribution to prestige outlets; low price suits mass channels.

• Promotion: discount campaigns, coupons, EDLP ads, psychological price points.

Assessment Task Overview

• Create a one-page colour flyer for a grocery store using at least 3 pricing policies above; include written rationale.

• Rubric weights knowledge/understanding, thinking, communication, application (professional layout, correct grammar, strategy explanation).