Price topic

• Price


  Price is the amount of money that the customer has to pay to receive the good or service
• Costs


  An amount that must be paid or spent to buy or obtain something. The effort, loss or sacrifice necessary to achieve or obtain something. Costs influence business' pricing decisions because businesses usually aim to make a profit. A business' price and costs determine how much profit the business will make. Businesses cannot afford to set a price lower than their costs forever.
• Product life cycle


  The stages through which goods and services move from the time they are introduced on the market until they are taken off the market. Where a product is in the product life cycle determines whether the business will charge a high or low price for the product
• Factors that influences a business' pricing decisions

  Costs

  Product Life Cycle

  Nature of Product

  Degree of Competition
• How does nature of product effect pricing

  -Whether a good is a luxury good will affect how much a business charges.

  -Whether the good is hard to differentiate from competitors affects how much a business can charge. If it is similar (homogenous), then businesses usually price at a similar level to competitors.
• How does degree of competition effect pricing

  because the more competition a business faces, the more options customers have.

  When customers have lots of options for similar products, businesses must compete to attract customers using a lower price.
• Price Skimming


  Price skimming is a pricing method where a business sets a relatively high initial price and then gradually lowers it over time. This is often used before a business faces competition in the market. Once competition arrives, there will be downward pressure on the price to fall.
• Advantages of Price Skimming

  -Firms recover R&D costs before competitors enter the market

  -Firms capture all consumer surplus

  -Allows for greater profit from customers prepared to pay premium price
• Disadvantages of Price Skimming

  - The high prices may discourage some consumers from buying the product

  -The strategy breaks down as other competitors enter the market

  -it can slow down the growth of a product and this can give competitors more time to launch a competing product or service
• cost-plus pricing


  Where a business adds together the cost of the raw materials, labour and over head costs for a product. Which gives the business a cost per unit, the business then adds it up a market-up percentage in order to arrive at the cost for the product
• Cost-Plus Pricing (Calculation)


  Variable cost per unit + a proportion of total cost (total cost per unit) + a percentage mark-up

  ◎ The percentage mark up is how much the business wants to achieve as profit

  ◎ Example:

  ◉ VC per unit = £5.00

  ◉ TC per unit = £10.00

  ◉ Mark-up = 25%

  ◉ Selling price = (£5.00 + £10.00) x 1.25 = £18.75
• Advantages of cost plus pricing

  - It is a simple and quick method of calculating the selling price of a product

  - A good way to ensure that the business covers its costs and makes a profit
• Disadvantage of cost plus pricing

  -Prices may come out too high, might not be competitive prices

  -It ignores price elasticities of demand and how sensitive the product is to raise in price.
• Penetration Pricing


  a pricing strategy in which a firm introduces a new product at a very low price to encourage more customers to purchase it and to get a foothold in the market and gain market s
• Advantages of Penetration Pricing

  -lowers chance of competitive entry

  -faster diffusion may help build image and loyalty

  -selling large quantities may result in lower costs (economies of scale)
• Disadvantages of penetration pricing

  -Low margin, bad unless volume is high enough

  -Firm needs enough capacity to serve demand

  -Later entrants may have better products

  -Price wars, negative product image, hard to raise price

  -Profit levels are likely to be low

  -As it's low price people may question the quality
• Predatory Pricing


  the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market
• Advantages of predatory pricing

  It drives competitors out the market
• Disadvantages of predatory pricing

  It's illegal on the competition law but is very hard to prove that low prices are intended to damage others
• Competitive pricing


  occurs when producers sell products at lower prices to lure customers away from rival producers, while still making a profit
• Advantages of competitive pricing

  - Consumers benefit from the low prices, especially in competitive markets

  - After using destroying pricing, realigning dominant firms could gain higher sales revenue
• Disadvantages of competitive pricing

  - you have to research on your competitors prices which costs time and money.
• Psychological pricing


  pricing goods and services at price points that make the product appear less expensive than it is to try and attract customers are looking for value, and example of this is setting a price that to £9.99 instead of £10
• Advantages of psychological pricing

  - The psychological effect of selling at a slightly lower price can obtain larger revenues

  - Since it looks at consumers perceptions, it is a strategy that can be suitably applied in many markets
• Disadvantages of psychological pricing

  Using prices such as 199 or 9.99 may be inconvenient for some businesses that require whole numbers in their transactions for example, transport businesses.
• Factors that determine the most appropriate pricing strategy

  USP

  PED

  Competition

  Strength of brand

  Stage in product life cycle

  Costs and ability to make a profit
• What is elasticity of demand?

  The responsiveness of demand in a change in either income, price or cross
• What is the formula of price elasticity of demand?

  percentage change in quantity demanded / percentage change in price

  
• What can affect price elasticity of demand?

  1. Availability of substitutes

  2. Cost of switching suppliers

  3. Degree of necessity

  4.Time frame when making a choice

  5. Brand Loyalty
• If PED = 0 how much is demand affected by price?

  demand is perfectly inelastic - demand does not change at all when the price changes - the demand curve will be vertical.

  
• If PED is between 0 and 1 how much is demand affected by price?


  The % change in demand from A to B is smaller than the percentage change in price), then demand is inelastic.

  
• If PED = 1 how much is demand affected by price?

  the % change in demand is exactly the same as the % change in price), then demand is unit elastic

  
• If PED > 1 how much is demand affected by price?

  Demand responds more than proportionately to a change in price i.e. demand is elastic.