Marketing Mix - Price

Some students will be able to analyse the purpose of having the correct pricing strategies. (Grade A)
All students should be able to identify the main pricing strategies and when they might applied (Grade C)
Most students should be able to explain cost plus, penetration, competition, skimming, promotional pricing (Grade B)

Consists of:

Product
- Functionality
- Design
- Quality
- Branding
- Packaging
- Services
- Warranty
Price
- List Price
- Discounts
- Allowances
- Payment period
- Credit terms
- Payment methods
Place
- Strategy
- Trade Channels
- Technology
- Coverage
- Assortments
- Locations
- Inventory
- Transportation
- Logistics
- E-Commerce
Promotion
- Advertising
- Personal selling
- Sales promotion
- Public relations
- Direct marketing
- Corporate Identity
- Form of promotion

Cost-plus or cost-based pricing: Adding a percentage (the mark-up) to the costs of producing a product to get the price.
Mark-up: Percentage added to costs that makes a profit for a business when setting the price.
Penetration pricing: Setting a low price to start with in order to get established in the market; price may be raised once established.
Competition-based pricing: Pricing strategies based on the prices charged by rivals.
Destroyer or predatory pricing: Setting a low price until rivals have gone out of business.
Patents: Legal documents giving a person or company the right to make or sell a new invention, product, or method of doing something and stating that no other person or company is allowed to do this
Loss leader: Product sold below cost to draw in customers.
Skimming or creaming: Setting a high price initially and then lowering it later.
Differentiate: To recognise or express the difference between things

Pricing is an essential element in the marketing mix, and getting it right is crucial.
Businesses must consider various factors when setting prices, including:
- Marketing Mix: Price must align with other elements, e.g., up-market products require higher prices.
- Objectives: Pricing can achieve specific aims, such as driving out rivals with very low prices.
- Costs: Prices must cover costs to ensure profitability. As costs increase, prices typically rise.
- Consumers' Perceptions: Prices should reflect value for money.
- Taxes: Many goods are subject to taxes (e.g., tobacco and petrol).
- Competition: Prices are influenced by rivals' prices. Intense competition limits a firm's control over pricing.

Cost-plus pricing is a cost-based method for setting prices.
It involves summing direct material costs, direct labor costs, and overhead costs, then adding a markup percentage to determine the product's price.

Penetration pricing is a marketing strategy to attract customers to a new product or service.
It involves offering a low initial price to lure customers from competitors.

Competitive pricing sets a product or service's price based on competitors' prices.
Commonly used by businesses selling similar products, as services can vary more than product attributes.

Eduardo Urondo runs a coffee shop in Rosario, Argentina.
In 2015, a multinational coffee chain opened a branch opposite his shop, charging prices half of Eduardo's.
Eduardo fears being forced out of business due to the multinational's ability to trade at a loss until competitors leave.

Price skimming is a product pricing strategy where a firm charges the highest initial price customers will pay.
After satisfying initial demand, the firm lowers the price to attract more price-sensitive customers.

Pharmaceutical companies invest heavily in R&D (e.g., Pfizer spent $US\$7200$ million in 2014).
They obtain patents to protect them from competition, allowing them to charge very high prices until the patent expires.
Once patents expire, competitors can produce generic versions, leading to lower prices.
For example, Atorvastatin (40 mg) sold for $US\$191$ per month in the USA just after it went generic, while a generic producer sold it for $US\$160$ per month. Another generic brand, Lovatstatin (40 mg), sold for just $US\$51$ per month.

What pricing strategy involves setting a very high price initially when a new product is launched?
- A. Penetration pricing
- B. Cost-plus pricing
- C. Promotional pricing
- D. Skimming (Correct Answer)
Which pricing strategy involves adding a mark-up to the costs of the product?
- A. Penetration pricing
- B. Cost-plus pricing (Correct Answer)
- C. Promotional pricing
Which of the following factors might affect the price charged by a business?
- A. Competition (Correct Answer)
- B. Income elasticity of demand
- C. The statement of comprehensive income
- D. Quotas
Which of the following is an example of promotional pricing?
- A. Cost-plus pricing
- B. Skimming
- C. Price leadership
- D. Loss leaders (Correct Answer)