4.5: Price

factors affecting price

- objectives
- taxes
- competition
- marketing mix
- costs
- consumers' perception

objectives

pricing used to achieve aims

taxes

goods have taxes on them

competition

prices are influenced by those charged by rivals

marketing mix

price has to fit in with the other elements

costs

costs should be covered so a profit is made

consumers' perception

prices should reflect value for money

pricing strategies

- cost-plus pricing
- penetration pricing
- competition-based pricing
- skimming
- promotional pricing

cost-plus pricing

involves adding a mark-up to total costs and having a profit margin

disadvantage of cost-plus pricing

ignores market conditions

penetration pricing

- businesses charging a low for a new product for a limited product
- gets products established in the market
- price increases later on
- favourable in mass markets

why do businesses use penetration pricing

- consumers become habitual of the product
- businesses can sell larger quantities of products and get established in the market if products are generously priced attracting bulk buyers

disadvantages of penetration pricing

- squeezed profit margin since cost is high
- risk of negative response as prices increase

competition-based pricing

- used in competitive markets
- businesses take a look at what rivals are charging
- safe pricing strategy

approaches to competition-based pricing

- charging the same as competitors
- price leadership

price leadership

- market leader (dominant firm in the market/lowest-cost producer) sets the price and all others follow
- businesses following the leader may have higher costs and lower profit margins

advantage of competition-based pricing

price war is avoided

non-price competition

- usually occurs in competitive markets where prices are similar
- involves special promotions or strategies designed to differentiate the product

predatory pricing

businesses lowering prices for temporary periods to drive out competition and make it difficult for rivals to compete and eventually have a larger market share

skimming

- businesses launch products in markets charging a high price for a limited time period
- this generates high revenue before competitors arrive

promotional pricing

lowering the price of a product for a short period of time to draw in customers

reasons prices are cut in promotional pricing

- getting rid of old stock
- generating cash quickly to solve a cash flow problem
- generate renewed interest in a product
- win a larger market share of the market

approaches to promotional pricing

- discounts and sales
- psychological pricing
- loss leaders

discounts and sales

- businesses cut prices and sell goods below standard price
- this may be seasonal

psychological pricing

setting the price slightly below a round figure to trick customers into thinking products are cheaper

loss leaders

products sold at a lower price than the cost to draw customers into the store and purchase other products