4.5b -

• Price refers to the amount paid by a customer to purchase a good or service
• Pricing decisions are a crucial part of any marketing strategy
• The dilemma facing businesses is to set a price that is competitive yet also profitable
• High pricing


  Deters customers
• Low pricing


  Can lead to a lack of stock (inventory) and hence dissatisfied customers
• Price can directly affect the corporate image of a business or its products
• Producers and suppliers of luxury brands may benefit from minimal price cuts in the short term but sustaining lower prices in the long term will damage their reputation
• Cost-plus (mark-up) pricing


  Involves adding a percentage or pre-determined amount of contribution to the cost per unit of output to determine the selling price
• Mark-up


  Percentage or specific amount added to the cost to determine selling price
• Cost-plus pricing

  • Simple and easy to calculate
  • Relies too much on intuitive decision making
• Penetration pricing


  Involves setting a low price in order to enter an industry
• Penetration pricing

  • Allows businesses to compete against existing firms
  • Often shown as heavily advertised discounted price
  • Suitable for mass market products
  • Suitable for products with high price elasticity of demand
• Loss-leader pricing


  Involves selling a good or service below its cost value
• Loss-leader pricing

  • Used by retailers to attract customers
  • Encourages brand switching
  • Aims to recoup loss through ongoing sales of complementary goods
• Predatory pricing


  Involves temporarily reducing price to force competitors out of the industry
• Predatory pricing

  • Price set so low to attract customers away from competitors
  • Common in supermarkets, airlines, and mobile phone industries
  • Illegal in many parts of the world
• Premium pricing

  Price of a good or service is set significantly higher than similar competing products
• Premium pricing

  • Customers perceive premium products as symbols of success
  • Demand tends to be price elastic
  • Example: popcorn, hot dogs, and soft drinks at movie theatres
• Dynamic pricing


  Practice of varying the price of a good or service to reflect changing market demand
• Dynamic pricing

  • Charges higher prices during peak periods
  • Flexible and adaptive pricing method
  • Used by airlines, cinemas, hotels, and taxi services
• Competitive pricing


  Practice of setting the price of goods or services at the same or similar level to competitors
• Competitive pricing


  • Pricing above, on, or below the competition
  • Commonly used method
  • Requires non-price methods to attract customers
• Contribution pricing


  Involves setting a price based on the direct costs of producing a product
• Contribution pricing

  • Ensures selling price covers direct costs
  • Allows different prices for different products based on contribution
• Price elasticity of demand (PED)


  Measures the degree of responsiveness of demand for a product due to a change in price
• Price elasticity of demand


  • Demand is price inelastic if PED is less than 1
  • Demand is unitary price elasticity if PED is equal to 1
  • Demand is price elastic if PED is greater than 1
• PED = percentage change in quantity demanded/percentage change in price