Chapter 12b

The marketing Mix - Price

 Learning Objectives
• In this chapter, you will learn:
1. Pricing methods (benefits and limitations of different methods) eg. Cost-
plus, competitive, penetration, skimming, and promotional.
2. How to recommend and justify an appropriate pricing method in given
circumstances.
3. The significance of price elasticity: difference between price-elastic
demand and price-inelastic demand; importance of the concept in
pricing decisions ( knowledge of the formula and calculations of PED will
not be examined)
 The role of pricing decisions in the marketing mix
• When deciding a price for either an existing product or a new
product, the business must be very careful to choose a price
which will fit in with the rest of the marketing mix.
• For example if the product is of high quality, is aimed at high-
income consumers, is wrapped in expensive packaging but has
a low price, consumers will think it is a low quality product
and will not buy it.
 Some products are sold at competitive prices because of the
competitive market.
 Some products face little competition because they are the
only ones available in the market and consumers are willing to
pay a high price for them.
 Pricing Strategies
• If a product is easily distinguished from other products, then it is probably a
branded product.
• Branded products have a distinctive name and packaging and are aimed at a
particular segment of the market.
• It is important to select an appropriate price to complement the brand image.
• Value-for-money brand should carry a low price.
• Products with a very strong brand image like Nike, Toyota or Apple iphones have a
lot of influence over the price to be paid by consumers.
• If a product has many competitors, the business must constantly monitor what its
competitors are charging for their products to make sure that their prices remain
competitive.
• A business can adopt new pricing strategies for the following reasons:
 To break into a new market
 To try to increase its market share
 To try to increase its profits
 To make sure its costs are covered and a target profit is earned.
• The product price which the business chooses to charge may be unrelated to its
manufacturing cost. This is because when the business thinks that it is the price
which the consumer is willing to pay. This could be well above the manufacturing
costs.
 The main methods of pricing
1. Cost-plus pricing involves the following:
 Estimating how many of the products will be produced.
 Calculating the total costs of producing the output.
 Adding a percentage mark-up for profit.
Benefits:
 the method is easy to apply.
 Different mark-up could be used for different markets.
 Each product earns a profit for the business.
Limitations:
 Business could lose sales if the selling price is higher than the competitors’ selling price.
 A total profit can only be made if sufficient units of the product are sold.
 There is no incentive to reduce costs – any increase in costs will be passed to the customer as a higher price.
For example: The total cost of making of making 2000 chocolate bars is $2,000. The business wants to make 50%
profit on each bar. The calculation is as follows:
($2,000/2000) + 50% = $1.50 per bar is the selling price.
(1 + 0.50 = $1.50)
The calculation to find 50% of the selling price is as follows:
$2,000/2,000 x 50/100 = 1 x 50/100 = $0.50
total cost/output x % mark-up = profit on each unit.
 The main methods of pricing
2. Competitive pricing involves setting prices in line with competitors’ prices or just
below their prices.
Benefits:
 Sales are likely to be high as the price is at a realistic level and the product is not
under- or over- priced.
 Avoids price competition which can reduce profits for all businesses in the
industry.
 Often used when it is difficult for consumers to distinguish between the products.
Limitations:
 If the costs of production is higher than the competitors, then a competitive price
could lead to losses.
 A higher quality product might need to be sold at a higher price which is above the
competitors’ price.
 It takes a lot of time, effort and money to find out what competitors are charging.
 The main methods of pricing
3. Penetration pricing
 This means the price is set lower than competitors’ prices.
 For example, a company launches a new product at a price several cents below
similar products already in the market. If this is successful, consumer will try it and
may become regular customers.
Benefits:
 Often used for new products to create an impact with customers.
 To ensure there are sales and the successful launch of a new product.
 To build up market share quickly.
Limitations:
 Lower selling price means lower profits.
 Customers may like the lower price and get turned off when the business starts to
raise the price.
 Not suitable for branded products with a reputation for quality.
 The main methods of pricing
4. Price skimming
This is only suitable for new innovative products or a new development of an old
product. The products costs a lot in research and development and these costs
needs to be recouped. It can also be sold at a high price because of the novelty
factor. Sometimes, the high price is used to highlight its high quality.
For example, a new computer game console is sold at a high price because it has
better graphics than the old system.
Benefits:
 It can help to establish a product as being of good quality.
 High research and development costs can be recouped quickly when it is sold at a
high price.
 High price will lead to profits being made quickly before competitors enter the
market – then the price will have to be reduced.
Limitations:
 The high price may discourage potential customers.
 The high price and high profitability may encourage competitors to enter the
market quickly.
 The main methods of pricing
5. Promotional pricing
It is used when a business wants to price a product at a low price for a set amount
of time to increase short term sales.
For example, a summer sale offering ‘Buy one, get one free’. It encourages
customers to buy one item in order to get a second one free and it will clear the
end of the season stock. However, the business will not make much, if any profit.
Benefits:
 Useful for getting rid of unwanted inventory that will not sell.
 It can help to renew interest in a product if sales are falling, for example during a
recession.
Limitations:
 The income will be lower because the price is reduced.
 It might lead to price competition again with competitors and the price might have
to be reduced again.
 The impact on psychology on price decisions
• The product price can have a deep impact upon customers’ perceptions about the
product.
 A very high price for a high quality product may mean high-income people can buy
it as a status symbol.
 If the price is set below a whole number, like 99 cents, this gives an impression of it
much cheaper.
 Supermarkets may set low prices for regular items to give an impression that the
business is value for money.
 Repeat sales happens when a customer reinforces its perceptions about a product.
This could be due to its brand image, confidence that it has a certain value about
its quality and it is worth another try.
 Using different pricing methods on the same product.
• Many businesses use different pricing methods to sell their products. It is
usually for different segments of the market or at different times. This is
called ‘dynamic pricing’. This happens when customers are charged prices
according to their ability to pay or the available supply of supply.
• Customers can be split into two or more groups and are then charged
differently for the same product because they have different abilities or
willingness to pay.
For example, Airlines often use different prices for flights to the same
airport at different times of the day or at different times of the year. For
example, ticket prices to popular tourist destinations are more expensive
during school holidays.
• Dynamic pricing are also used online to reflect rapid changes in consumer
demand. If demand goes up, prices also go up.
• Football match tickets also use this method. For example, tickets for the
finals are always priced higher than qualifying matches.
 Price elasticity of demand
• Price elasticity of demand measures the responsiveness of a demand to changes in
prices.
• Price elasticity is heavily influenced by the number of close substitutes of the
product.
• When there are many close substitutes, even a small increase in price, customers
will go for the substitutes. For example, if there is a 5% increase in the price of
cooking oil, consumers will switch to other brands and it may result in a fall of 15%
in sales. Such products are said to have price-elastic demand – meaning the
percentage change in demand is greater than the change in price.
• If there are no close substitutes and the price increases by 15%, there could only
be a slight reduction in sales of maybe 5%. In this case, the product is said to have
price-inelastic demand.
• Therefore, if the product is price-elastic, it is not a good idea to raise prices unless
there are rising costs.
• If the product is price-inelastic, the business can raise prices to increase revenue.
• End of presentation