4.5 - 7P's: Price

pricing method

various ways a bus determines the price of a g/s

cost plus pricing

adding a profit element to cost of produciton, price is set above cost by a predetermined amount

loss leader

setting price of a g/s below the cost of production to attract customers to buy the product and others with higher profit margins. short term method and is unsustainable

beenfits of cost plus

• simplist piricing and suitable for all products

• straightfoward to calculate

• ensures selling price covers production to atleast break even

dis of cost plus

• ignores impact of lower prices rivals may charge

  • doesnt focus on raising demand, instead the calculated price

formula for cost plus

price = cost of production + profit margin

benefit of loss leader

• help gain loyalty bc people like bargains

• increase sales revenue from customers buying other goods while purchasing loss leaders in retail

• effective to get rid og old stock and merchandise

dis of loss leader

• customers may come to expect loss leaders, they are expensive and unsustaiibale for.a bus

• if a firm makes a loss in loss leaders, no guarantee customers will buy other products in addition

• firms need to ensure sufficicent stocks of loss leaders which can lead to stockpiling

premium pricing

sets a high price substantially aove market average used to convey the luxury, quality and superirity of the product of brand. sustanibale bc there is prestige associated with the prodcut and works best when customers arent sensitive to price changes ( high loyality)

adv of premium pricing 

• high profit margins

• can increase brand value

• premium products can become status symbols with brands enjoying free word of mouth marketing

dis of premium pricing 

• limited customer base bc product is exclusive

• hgih marketing costs to create brand awareness and to convince to buy

• not suitable for most products especially marketing with high competition

penetration pricing

setting the price low to enter the industry to gain market share. the low price creates brand awareness and is a short-med term method that can lead to loss or low profit margins, not sustainable

adv of penetration pricing

• allows bus to enter a market and launch into existing markets, and gain market share quickly

• discourages new competition from entering becayse low profit margins and low prices

• competitve advantage

• encourages word of mouth

• can force bus to focus on cutting costs, increase productivity and improving efficieny in order to charge low prices

dis of penetration pricing

• if costs increase suddenly it can lead to operating loss

• low price might build corperate image of low quality which is hard to dissolve when price increases

• firm may loose customers who care more about quality than low price

• customers may come to expect low prices making it difficult for business to raise them later

dynamic pricng

pricing based on different time periods to reflect changes in level of demand. price surges when demand is high and drops when low

adv of dynamic pricing

• premium price charges during peak times leading to high profit margins

• discounted prices during off peaks help the firm make better use of its capactiy

• can imporve stock control ex. discounted for overstocked products

dis of dynamic pricing

• customer disatisfaction, some pay more than others

• decreases loyalty because cstomers will look for the best deals elsewhere

• time consuming because bus needs to monitor supply and demand also manage its own resources ( employees)

competeitive pricing

firm sets price in relation to price set by competition. common in markets where you can make a direct comparison between different prodcuts 

adv of comp pricing

• benchmark price ensures firms products are competitvly priced

• low risk strategy especially for new bus in highly competitive markets

dis of comp pricing

• undercutting the prices of a competitior can start a price war leading to low profit margins for everybody

• price doesnt equate to competitivness, bus may need to also consider branding, quality etc

contribution pricing

setting price thats over variable cost per unit of producing the product sale of each procduct makes a positive contribution to payment of fixed costs. once fixed costs are covered, bus makes profit

adv of contribution pricing

• useful for business to know how much contribution is earned per sale so they know to how much to sell to break even 

• flexible method and bus can use existing data

• useful for business who do special orders bc they can determine profit to be earned

dis of contibution pricing

• contribution doesnt equal profit. a high price and quick breaj even doesnt mean people will buy high process

• allocating fixed cost btw diff products can be a bit sibjective and can lead to inacurate or uncompetitive prices

price elastic demand

occurs if change in price leads to bigger porportional chnagein quantity demanded ex. if price falls 5% demand increases 10% for soft drinks and candy

price inelastic demand

occurs if change in rpice leads to smaller porportional chnagein quantity demand ex. price increases 10% demand only falls 5% for neccesities like salt, electricity  and nail clippers

formula for ped

% change in quantity demand / % change in price

what r the determinants of ped

1. subsitution - greater number of close subsitiutions, more competitive prices leading to the increasing value of price elastic demand. g/s with few subsitiutions leads to price inelastic demand

2. neccesity - essential g/s are price inelastic because people will always buy even if the price increases. luxuries are price elastic

3. income - more income spent on g/s leads to increase in price elatic demand

4. time - people need time to find alternates and adapt. over time they can adjust demand based on more permanaent price chnages

what happens when price increases

price inelastic prodcuts sale revenue increases, price elastics sr decrease

what happens when price decreases

price inelastics sr decrease and prie elastics sr increases

price elasiticyt of demand

measures the extent to which demand for a prodcut is responsive to chnages in the price of a product. helps to know the impact of price chnages on sales revenue to improve price descisions