4.5b Price

Price

amount paid by a customer to purchase a good or service.

mark up/cost plus pricing

add of a percentage or predeterined amount of contribution to cost per unit of output of outputpredetermined

advantage of mark up

ease of calculation

simplicity

disadvantage mark up

relies too much on intuitive decision making than actual market research about needs of customers

penetration pricing

pricing method that sets a low price to enter industry. allows business to compete against existing firms and gain market share

penetration pricing is suitable for

mass market products selling in large enough volumes

product with high ped

loss leader pricing

selling a good or service below its cost value

to attract customers - also to purchase other products with mark up

predatory pricing

temporarily reduce price to force competitors out of industry as they cannot compete in profitable way

premium pricing

price is set significantly higher than similar competing products

usually due to high quality or uniqueness

dynamic pricing

practice of varying the price to reflect changing demand

advantages of dynamic pricing

greater control over pricing method

real time data to ensure optimal price

disadvantage dynamic pricing

customers unhappy - feeling overcharged

damage reputation or harm future sales

competitive pricing

pratice setting the price at same or similar level to competitors

also referred as going rate pricing

competing pricing suuitable for

industry where product has been on market for a while

wide range of substitutes

3 options for competitive pricing

pricing above/ on the same/below

contribution pricing

setting pruce based on direct cost of producing product

contribution

amount left over from selling price after deducting all direct cost of production

advantage of contribution pricing

high enough to cover both direct and indirect cost

important when customers wants to place large order at discounted price

limitation of contribution pricing

subjective - allocating indirect cost between different products

price elasticity of demand

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

inelastic

small change in quantity demand

elastic

large change in demand

when is it elastic

greater than 1

ped equal to 1

unitary price

ped formula

percentage change in quantity demand.percentage change in price

ped helps to

decide pricing policy

determine which product affected by downturn economy

predicting the effects of exchange rate fluctuations

help government determine optimum level of taxes

price wars

business competing by a series of continous intensive price cuts to theaten competitiveness of rival firm