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Chapter 13: The marketing mix:price (Main methods of pricing…
Chapter 13: The marketing mix:price
The role of pricing decisions in the marketing mix
the business must be careful to choose a price which will fit in with the rest of the marketing mix of the product; if new product is high quality, to be aimed at upper class consumers, is wrapped in luxurious packaging, but low price, consumers will not think it's good quality.
Many products have brand image. Price will not just be determined by demand and supply in the market, but also the producer
A business can adopt new pricing strategies for several reasons: (business objective being sought will affect pricing strategies)
try to break into a new market
to try increase its market share
to try increase its profits
to make sure all its costs are covered and a particular profit is earned
Main methods of pricing
Cost-plus pricing: The cost of manufacturing the product plus a profit mark-up.
The method is easy to apply
You could lose sales if selling price is a lot higher than competitor's price
cover costs and ensure a certain profit is made
Competitive pricing: When the product is priced in line with or just below the competitor’s prices to try to capture more of the market.
Sales are likely to be high as your price is at a realistic level and the product is not under- or over-priced
In order to decide what this price should be, you would have to research what price your competitors are charging, and this costs time and money
Penetration pricing: When the price is set lower than the competitor’s prices in order to be able to enter a new market.
Ensures sales are made and the new product enters the market
The product is sold at a low price and therefore the profit per unit sold may be low
Price skimming: Where a high price is set for a new product on the market.
skimming can help to establish the product as being of good quality
It may out off some potential customers because of the high price
to make high profit and recoup research and development costs
Promotional pricing: When a product is sold at a very low price for a short period of time.
It is useful for getting rid of unwanted stock that will not sell
It can help to renew interest in a business if sales are falling
The sales revenue will be lower because the price of each time will be low
Psychological pricing: When particular attention is paid to the effect that the price of a product will have upon customers' perceptions of the product
Might involve charging a very high price for a high-quality product so that high income costumers wish to purchase it as a status symbol
Could also involve charging a price for a product which is just below a whole number
Supermarkets may charge low prices for products purchased on a regular basis and this will give customers the impression of being given good value for money
Ensures sales are made by reinforcing consumers' perceptions of the product
Little sales revenue is lost by putting price just below the price the business wants to sell the product for
Competitors may do the same and so reduce its effect
Dynamic pricing: Charging different consumer groups different prices
Can lead to increased revenue and profits but can also add to costs as prices are constantly changing.
Price elasticity of demand (A measure of the responsiveness of demand to a change in price.)
If there are many close substitutes for the product then, even if its price rises only a small percentage, consumers will respond by buying the substitute product and so demand for the original product will fall by a larger percentage
Price-elastic demand - the percentage change in quantity demanded is greater than the percentage change in price
Prices increase by 5% then sales decrease by 15% = falling revenue for the business
Price-inelastic demand - the percentage change in quantity demanded is less than the percentage change in price
price increase by 15% then sales decrease by 5% = increasing revenue for the business