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
- cost of production
- competitive conditions in the market
- competitors' prices
- marketing objectives
- price elasticity of demand
- 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
- penetration pricing - setting a relatively low price often supported by strong promotion in order to achieve a high volume of sales
- 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
- psychological prices - setting prices that take account of customers' perception of value of the product
- loss leaders - product sold at a very low price to encourage consumers to buy other products
- price discrimination - occurs when a business sells the same product to different consumers at different prices
- 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