chapter 13: marketing mix, price

Pricing strategies

IMPORTANT:

* It is important to select an appropriate price to complement a brand image; a value for money brand should have a low price.


* The business must constantly monitor what its competitors are charging for their products to make sure its prices remain constant.

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REASONS FOR ADOPTING NEW PRICING STRATEGIES:

* To break into a new market
* To increase market share
* To increase profits
* To make sure all costs are covered and a particular profit is earned

Cost-plus pricing

Cost-plus pricing is the cost of manufacturing the product plus a profit mark-up. Total cost /output+ % mark up.

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WHAT IT IS:

* estimating how many units of the product will be produced.
* Calculating the total cost of producing this output
* adding a percentage mark-up for profit.

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BENEFITS:

* the method is easy to apply
* different profit mark-ups could be used in diff markets.
* each product earns a profit for the business.

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LIMITATIONS:

* businesses could lose sales if price is above competitor’s.
* a total profit will only be made if sufficient units are sold.
* no incentive to reduce costs, increase in costs is passed on to customer as a higher price.

Competitive Pricing

Competitive pricing is when the product is priced in line with or just below competitors’ prices to try to capture more of the market.

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BENEFITS:

* sales are likely to be high as prices are realistic and product is not under/over priced.
* avoids price competition, which can reduce profits for all business in industry.
* often used when it is difficult for consumers to tell the difference between the products of different businesses.

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LIMITATIONS:

* If costs of production for a business are higher than those of competitors, then a competitive price could lead to losses being made.
* higher quality product might need to be sold at a price above competitors’ prices to give it a higher quality image.
* in order to decide what this price should be, detailed research needs to be carried out which is costly.

Penetration Pricing

Penetration pricing means the price would be set lower than the competitors’ prices.

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BENEFITS:

* Newly launched products create an impact with customers.
* It should ensure that sales are made and new product sucesfully enters the market.
* market share builds up quickly.

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LIMITATIONS:

* Product is sold at a lower price therefore profit per unit maybe low.
* customers might get used to low prices and not buy products if the business raises the price.
* might not be appropriate for a branded product with a reputation for quality.

Price Skimming

Price skimming is where a high price is set for a new market on the product.

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BENEFITS:

* skimming can help establish the product as being of good quality.
* high research and development costs can be reapidly covered from the profit made.
* if the product is unique, a high price will lead to profits being made before competitors’ launch similar products- then price will have to be reduced.

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LIMITATIONS:

* the high price may discourage some potential customers from buying it.
* the high price and high profitability may encourage more competitors to enter the market.

PROMOTIONAL PRICING

Promotional pricing is when a product is sold at a very low price for a short period of time.

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BENEFITS:

* getting rid of unwanted inventory that will not sell.
* help renew interest in a product if sales are falling (during economic recession).

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LIMITATIONS:

* The revenue will be lower because the price of each item will be reduced.
* It might lead to a price competition with competitors- so the business migh have to reduce prices again.

Impact of psychology on pricing

* It is when price is set to match consumer expectations and perceptions of a product
* It may involve charging high prices for high quality goods
* It may involve charging the price below a whole number
* Low prices for basic necessities may give a good impression of being good value of money
* Ensures sales are made
* Sales revenue may be lost
* Competitors may follow, low effect

Dynamic Pricing

It means charging different customer groups, different prices for the same product because they have different demand levels

* Made it easier to adopt with the growth of online marketing
* High revenue and profits
* Increased costs

Price elasticity of Demand

Price elasticity is a measure of responsiveness of demand to a change in price.

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Price elastic Demand is where consumer are vey sensitive to changes in price.

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Price inelastic Demand is where consumers are not sesntive to changes in price.

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* PED is affected to the no of substitutes available ⦁ Price-Elastic Demand is when the % change in demand is GREATER than the % change in price i.e., prices increase by 5% but then sales decrease by 10%. Therefore, there is falling revenue for the business
* Price-Inelastic Demand is when the % change in demand is LESS than the % change in price
* This means you can increase the price of the product a lot without the demand changing (i.e., oil & petrol because people have to buy it)