price

• what is price in terms of the marketing mix ?

  Price is the amount of money that the customer has to pay to receive the good or service.
• what is the importance of pricing ?

  • If the price is set too high then demand will be low and costs may not be covered.
  • If the price is set too low the customer may doubt the quality and reliability of the product and sales will fall. Customers may doubt the prestige of the product. Costs may not be covered.
  • The elasticity of the product is also important. Depending on whether the product or service is seen as a necessity or a luxury, recognising price elasticity of demand and setting the correct price is essential to avoid falling revenue.
• price strategies - price makers

  The market mechanism, through the interaction of supply and demand, will set the price of products and also determine the quantity supplied.
• price strategies - price makers

  When a business is not a price taker, which is the case in the majority of markets, then it has the opportunity of using pricing strategies.
• price makers - cost based strategies

  The business will charge a price based on the production costs

  (product-orientated approach).

  The costs will be calculated and then a mark-up or profit

  margin will be added to arrive at the price charged.

  • Cost-plus pricing
  • Contribution pricing
• price makers - marker orientated strategies

  A business will charge a price based on the market and competitors

  (market-orientated approach).

  Several different market-led pricing strategies can be used:

  • Competitive
  • Penetration
  • Skimming
  • Psychological
  • Loss-leaders
  • Price discrimination
• what is the definiton of cost -plus pricing

  When a percentage mark up is added to the cost of producing a good or service to calculate the selling price
• what is the calculation of cost plus pricing ?

  Variable cost per unit + a proportion of total cost (total cost per unit) + a percentage mark-up
• what is contribution pricing ?

  Prices are set to cover the variable costs of making a product

  and make a contribution towards:

  • the fixed costs
  • profit – once all of the fixed costs are covered the contribution becomes profit

  Contribution = selling price – variable costs

  Selling price = variable cost + contribution
• what is the definition of competitive pricing ?

  Prices are based on the prices charged by competitors, maybe the same or slightly lower.

  Firms will try to compete on other aspects of the marketing mix.
• what is the definition of penetration pricing ?

  Price penetration involves setting a low initial price for a new product in order to get a foothold in the market and gain market share.
• key points of penetration pricing ?

  • May be a suitable pricing strategy for a product in a mass market
  • A firm will release a new product at a low price with the aim of enticing people to buy
  • The aim is to gain an early customer base
  • Once the product has been launched and built up a customer base the firm may raise the price
  • Likely to be used with a price elastic product
• what is the definition of price skimming ?

  Setting a price at a high level to create a high quality and exclusive image.
• key points of price skimming ?

  • to take advantage of the newness of the product and gain as much revenue/profit as possible while it remains unique in the market i.e. before competitors come into the market with a similar product; to generate revenue in a short period of time so that high R&D costs can be recovered quickly and/or further investment in the product can be made or to cover launch costs/R&D costs
• definition of psychological pricing ?

  Occurs when a firm sets a price for the product in order to entice the customer into making a purchase by making it sound cheaper than it actually is.
• what is loss leader pricing ?

  Loss leader pricing involves the selling of products at a loss, with the expectation that this will generate further sales of some form, elsewhere in the business. The additional sales that occur will hopefully recoup the initial loss and subsequently make a profit for the business.
• examples of loss leader pricing ?

  • Supermarkets selling goods like bread at a loss or heavily discounted beer and wine in order to attract customers into their stores. 
  • Free mobile phones, where profits will be made on line rentals. Most mobile phones are now sold on a loss leader basis.
• what is discrimination pricing ?

  The businesses charge different prices to different customers for the same product.
• what are the advantages of using correct pricing strategy ?

  • The right strategy will increase sales 
  • Profits will rise
  • Prices can reflect the market for the products
  • Prices can take into account actions of competitors
• what are the disadvantages of using correct pricing strategy ?

  • Competitors may follow pricing strategy – so no effect 
  • No increase in sales
  • Need for expensive advertising to promote pricing strategy 
  • Some segments may not be happy with pricing strategy