Business In the Real World PAPER 2

What does a business need to consider when setting a price?

• Cost of making the product : If price is greater than unit cost will ensure profitability

• Quality of the product

• Brand image of product : Requires high level of marketing activity

• Demand and supply of a product : Charging higher for popular products

What is pricing low?

This is done to achieve a high volume of sales on products with low USP.

What is pricing high?

Produces low volume of sales at a high profit margin often used when selling luxuries as brands are already established.

Penetration Pricing

Setting a low price initially to attract customers often to a new product then increasing costs once aims have been reached.

Price Skimming

Setting a high price initially and then lowering costs to attract price sensitive customers.

Loss Leader

A product is sold at a loss (no profit made) to bring customers to a business in hopes they will purchase other higher profit items.

Phycological Pricing

Makes customers believe they are paying less than what it really costs. Attracts customers looking for value.

Competitor Based Pricing

Business aligns its cost with other competitors in the market, however have to also use non-price methods to attract and retain customers.

Boston Matrix

• Cash Cow : The section of a products lifespan here it is established and profitable

• Dogs : Low growth, low market share

• Problem Child : High growth, low market share, cash absorbing

• Stars : Need heavy investment to sustain growth but it will slow down and they will become cash cows

Purpose of Boston Matrix

• Analysis of product portfolio decisions

• Doesn’t take into account environmental factors

• Snapshot of the current position

Cost Plus Pricing

Adding cost of making a product and adding on a percentage.

Factors that influence price?

• Costs

• Demand

• Degree of competition

• Product life cycle

• Brand image