Price

Price elasticity of demand

the degree of responsiveness of demand for a product due to a change in the price of that product

Price inelastic

A relatively small change in quantity demanded following a change in price

Price elastic

there is a large change in demand following a change in the price

Factors that affect price elasticity

Substitution, necessity, time, addiction, habits

PED formula

percentage change in quantity demanded / percentage change in price

Explanation of PED formula

• less than 1: price inelastic

• 1: unitary price elasticity —> proportional change

• greater than 1: price elastic

price

the amount paid by a customer to purchase a good or service. The pricing decision depends on a DRASTIC number of factors

Factors

demand, rivalry, aims, supply, scarcity, time, image, costs of production

Cost-up pricing

The pricing strategy involves working out the average cost per unit of a product and then adding a percentage mark-up It’s simple and easy to calculate. However, it does not consider the needs of customers.

Penetration pricing

• Pricing method that involves setting a low price in order to enter an industry.

• It allows the business to compete against esiting firms in the industry to gain market share.

• Takes the form of heavily advertised discounted price

• Brand recognition and awareness.

Loss leader

Selling a good or service below its cost value. This is used to tempt customers into the store to buy the more profitable products at the same time. Recoup the loss by selling complementary products

ADV and DIS of loss leader

Merits: 

• Suitable for products such as supermarket low-cost, coffee machines own-brand coffee pods) Incentives customers to switch brands 

Drawbacks: 

• Setting prices too low may damage the prestige   and image of the brand

ADV and DIS of penetration pricing

Merits: 

• Mass market products sold in large volumes 

• New firms trying to enter established markets 

Drawbacks:

• If prices are set too low, it can cause customers to perceive the product as inferior and off poor quality

Predatory pricing

Involves temporarily reducing prices with the intention of forcing a competitor out of a market. This method is used when an existing firm is threatened with new competition. Price wars often ensue in the “race to the bottom.” Commonly used in supermarket, airline and smartphone sectors.

Predatory Pricing adv and dis

Merits: 

• Price wars can bring customers to a firm in the short-term

Drawbacks: 

• These customers may not necessarily stay with a firm in the long-term as they are not brand loyal. 

• In many parts of the world, this type of pricing strategies is illegal

Price war

The process of rival businesses competing by continually reducing prices so as to threaten the competitiveness of rivals in the market.

Premium pricing

When the price of a good or service is set significantly higher than similar competing products. This is usually because the product is higher quality or sufficiently unique enough to justify the premium price. 

• tends to be long-term

• increases profit margins

adv and dis of premium pricing

Merits: 

• Generates higher profit margins

• Create higher barriers to entry for competitors 

Drawbacks: 

• Limits the number of customers due to relatively high price 

• May lose status if they appeal to mass market 

• Requires strong brand loyalty which is expensive and difficult to establish

Dynamic pricing / Surge-pricing (3)

This is varying the price of a good or service to reflect changing market demand. Businesses charge higher prices during peak periods and lower prices during off-peak periods. This is a flexible and adaptive method of pricing designed to capitalize on changing market conditions 

adv and dis of Surge pricing

Merits: 

• Gives greater control over method of pricing to maximize profits 

Drawbacks: 

• Customers can feel unhappy about how high a price they can expect to pay 

• Can lead to price wars during off-peak periods which is not sustainable in the long-term 

• Is it ethical?

Competitive pricing

A firm sets the price of its goods and services at the same or similar level to its competitors. It is commonly used where a product has been on a market for a while and there are many substitutes available. There are three types:

• Above the competition 

• Same as the competition 

• Below the competition

Contribution pricing

involves setting a price based on the direct costs of producing a product

ADV and DIS of contribution pricing

Merits: 

• Ensures selling price is high enough to cover both direct and indirect costs 

Drawbacks: 

• The allocation of indirect costs between different products can be subjective

Contribution

per unit difference between selling price and direct cost of production