The Marketing Book 5th Edition

Current costs

per unit

Today's selling

price

Long-term

achievement of

super profit

Long-term expected

volume based on

today's selling price

Long-term

cost per unit

Profit margin to

achieve long-term

required rate of

return

Short-term

losses

Prices

set now

based on

long-term

Log price and cost per unitcosts

(in real £s)

Log cumulative volume

⎫

⎬

⎭

⎫

⎬

⎭

⎫

⎪

⎬

⎪

⎭

Controlling marketing and the measurement of marketing effectiveness 527

This predictive knowledge can be used in
the marketing strategy because the business
could set its prices today based on its long-term
costs rather than its current costs; this is
diagrammatically illustrated in Figure 20.12.
This pricing strategy would probably
result in the business making a loss on its
current sales, but these sales should increase
rapidly as the low prices stimulated demand.
These increasing sales volumes should propel
the business rapidly down its experience curve

• towards its long-term cost level, at which it
  should achieve a super profit. If it can gain a
  sustainable long-term cost advantage over its
  competitors by this strategy, it should regard
  the initial losses as an investment in creating a
  sustainable competitive advantage.
  The idea of having a sustainable cost
  advantage also indicates another important
  aspect of product-based strategies. The man-
  agement accounting needs of a low-cost-based
  strategy are fundamentally different to those of

product-based strategies built on differentiated

or value-added products. As was discussed

early in the chapter, any sustainable com-

petitive advantage is a relative concept which

must be evaluated and controlled by reference

to an appropriate set of competitors.

Thus, the required competitor analysis

focuses on the source of relative competitive

advantage or disadvantage. Where the main

basis of competition is on price, because there is

no customer-perceived difference among com-

peting products, the relevant competitor analy-

sis should concentrate on cost benchmarking.

In this commodity-based, price-conscious envi-

ronment, the lowest-cost supplier will normally

win and relatively small cost differences can be

critical.

However, if the basis of competition is

differentiation rather than price, an excessive

emphasis on external cost comparisons or even

internal cost reductions can be very counter-

productive. A cost difference no longer neces-

Figure 20.12 Life cycle costing techniques: strategic use of experience curves in setting prices. The short-
term loss per unit, if successful, is really an investment in developing a long-term sustainable cost advantage