4.5 The four Ps - product, price, promotion & place

Introduction - price

  • Price is the amount paid by consumers for a product. Price is vital component of the marketing mix as it impacts on the consumer demand for the product.

Pricing level will also:

  • determine the degree of value added by the business to bought-in components
  • influence the revenue & profit made by a business due to the impact on demand
  • reflect the marketing objectives of the business & help establish the psychological image & identity of a product

Factors determining the price decision

  1. cost of production
  2. competitive conditions in the market
  3. competitors' prices
  4. marketing objectives
  5. price elasticity of demand
  6. whether it is a new or an existing product

Pricing strategies

Cost-based pricing

cost-plus pricing

definition: adding a fixed mark-up for profit to the unit price of a product

  • This method often used by retailers
  • The size of the mark-up usually depends upon a combination of the strength of demand for the product, the number of competitors and the age & stage of life of the product (also depends on traditional practice in industry sometimes)

Market-based pricing strategies

  1. penetration pricing - setting a relatively low price often supported by strong promotion in order to achieve a high volume of sales
  1. market skimming - setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand
  1. psychological prices - setting prices that take account of customers' perception of value of the product
  1. loss leaders - product sold at a very low price to encourage consumers to buy other products
  1. price discrimination - occurs when a business sells the same product to different consumers at different prices
  1. promotional pricing - special low prices to gain market share or sell off excess stock - includes 'buy one get one free'

Price leadership

  • Usually exists when a company is the dominant firm in the market - i.e. has highest market share.
  • This bussiness benefits from economies of scale & has the lowest unit costs in the industry.
  • When a dominant company aggresively lowers prices specifically because it knows the smaller companies in the industry cannot sustain a lower price, this is called predatory pricing

predatory pricing

deliberately undercutting competitors' prices in order to try t force them out of the market