4.5 The 7 P's of marketing - Price

What are costs?

Costs are what a business spends in order to make a product, so the production costs

What is the price?

The value which is added onto the cost, and sold to customers, in order to earn profit

What are strategies to setting a price?

Cost plus pricing

Price penetration

Loss leader

Predatory pricing

Premium pricing

What is cost plus pricing?

When a business calculates the cost of production, and adds a markup, in order to set the final price which will allow the business to earn profit

What is price penetration?

It is when a company sets a low initial price in order to enter the market, and then increases prices over time

What is loss leader?

It is when a business charges the price below the cost of production. The aim of this method is to motivate customers to buy other high-priced items as well, which will make up for the loss

What is predatory pricing?

It is pricing products at such a low level that firms cannot compete

What is premium pricing?

When a business sets their products at high prices, due to their good brand image, good quality, customer loyalty etc.

What are advantages and disadvantages of cost plus pricing?

Advantage: the price is easy to determine and calculate.

Disadvantage: the price doesn’t consider the needs of customers, as the price may be set to high and be unaffordable. It doesn’t consider competitor prices

What are advantages and disadvantages of price penetration?

Advantages: It helps new firms enter established markets, as the low initial prices create competition

Disadvantages: If the initial price is set too low, customers could perceive the product as poor quality. As the prices increase, the customers may not stay with the firm in the long-term

What are advantages and disadvantages of loss leader?

Advantages: it motivates customers to switch brands, as the prices are so low

Disadvantages: if the prices are too low, it could disrupt brand image, as the products may be seen as poor quality. A loss is made

What are advantages and disadvantages of predatory pricing?

Advantages: the low prices bring customers to the firm in the short term. Competition is eliminated

Disadvantages: the prices may be so low that losses are being made. Other firms may compete, as the prices go lower and lower, so the firms make many losses

What are advantage and disadvantages of premium pricing?

Advantages: generates higher profits, and the good brand image creates higher barriers to entry for competitors

Disadvantages: The customer base is limited, as only people with high income are targeted. Setting premium prices also requires strong brand loyalty, which is expensive to maintain

Name some factors that affect the price of a product

• the level of demand

• the cost of supply / cost of production / cost of resources

• level of inflation / economic situation

• level of competition / level of market share

• brand image / customer loyalty

• time taken for production

• type of product

• aim of business (e.g., non-profit organization?)

HL - what are the advanced strategies to setting a price of a product?

Dynamic pricing - changing prices based on the levels of demand

Competitive pricing - changing prices according to the level of prices charged by competitors

Contribution pricing - setting prices that are larger than costs (direct and indirect costs)

What are advantages and disadvantages of dynamic pricing?

Advantages

• Easy to change price based on demand due to market research - flexibility

• Maximizes revenue

• Optimal use of resources - when demand is high, the price is high to make sure not all resources are used up. When demand is low, prices are low to attract more customers to use up more resources

Disadvantages

• Customer dissatisfaction as they feel like they are being taken advantage of - harms business reputation and customer loyalty

• If market research is bad, it may be difficult to investigate levels of demand

Advantages and disadvantages of competitive pricing?

Advantages

• It’s simple to mimic competitors - flexibility

• Customers from competitors may also go to the business as prices are similar, seem familiar and reasonable

Disadvantages

• May lead to price wars

• If the business has better quality, but its prices are the same as competitors, customers may think that the quality is the same as its competitors

Advantages and disadvantages of contribution pricing?

Advantages

• Always ensures that no loss is being made

Disadvantages

• If product has higher value than prices set, business misses out on potential profits

• doesn’t take level of demand or competition into account

How can price elasticity of demand help a business to set its prices?

A business can determine whether its products are price inelastic or price elastic. If they are price inelastic, they can charge higher prices and earn more revenue