The marketing mix- PRICE
Chapter 13
Role of pricing decisions
• Prices should be well coordinated with the
marketing mix
• High quality- high prices
• Brand image
• Type of market (level of competitiveness)
Pricing strategies
• A business adopts new pricing strategies for
the following reasons
To try to break into a new market
To try to increase its market share
To try to increase its profits
To make sure all its costs are covered and
target profit is earned
Main methods of pricing
• Cost plus pricing
• Estimates how many units of the product will be
produced
• Calculating the total cost of the product
• Adding a percentage mark-up for product
• Benefits
• Method is easy to apply
• Different profit markups can be used in different
markets
• Each product earns a profit for the business
• Limitations
• Business would lose sales if the prices are
greater than competitor prices
• A total profit will only be made if sufficient
output is sold
• No incentive to reduce costs
Competitive pricing
• It involves setting prices in line with the
competitors prices or even below them
• Benefits
• Sales likely to be high as prices are at a
realistic level (not over or under priced)
• Avoids price competition
• Often used when it is difficult to differentiate
between products of different businesses
• Limitations
• If the cost of production of the business is
higher then the business might make a loss
• A higher quality product might need to be sold
at a price above competitors prices to give it a
higher quality image
• Detailed research needs to be done to find out
about the prices
Penetration Pricing
• It means the price would be set lower than
the competitors’ prices
• Benefits
• Often used for newly launched products to
create an impact with the customers
• Market share builds up quickly
• Should ensure sales are made and the new
product enters the market successfully
• Limitations
• The product is sold at a low price and therefore
the profit per unit might be low
• Customers might get used to low prices and
reject the product if the business starts to raise
the prices after the products early success
• Might not be appropriate for a branded
product
Price skimming
• With this method, the product is usually a new
invention or a new development of an old
product
• High price because of the novelty factor
• The product will often have a high cost of
research and development and therefore these
costs need to be recouped
• High price will indicate the high quality of the
product
• Benefits
• It can help establish the product as being of good quality
• High R&D cost can be recouped
• If the product is unique, a high price will lead to profits being
made before the competitors launch similar products
• Limitations
• High price may discourage some customers from buying it
• High price and high profitability may encourage more
competitors to enter the market
Promotional pricing
• This would be used when a business wants to
price a product at a low price for a set amount
of time to increase short term sales
• Benefits
• Useful for getting rid of unwanted inventory that will
not sell
• It can help to renew interest in a product if sales are
falling, esp during an economic recession
• Limitations
• The revenue will be lower because the price of each
item will be reduced
• Might lead to a price competition with competitors- so
the business might have to reduce prices again
Impact of psychology on pricing
decisions
• High price is attached with status symbol
• Supermarkets may charge a bit lower for
products purchased on a daily basis that gives
the impression of good value for money
• When the price is set just below a whole
number for example $99, $499, etc
Using different pricing methods for
the same product
• This is when businesses change product
prices, usually when selling online, depending
on the level of demand
• Example is of airline tickets, prices of hotels
when they are being booked according to the
time and level of demand
Price elasticity of demand
• Price elastic demand is where consumers are very
sensitive to changes in price
• Price inelastic demand is where consumers are not
sensitive to changes in price
• Responsiveness to price depends on the number of
substitutes available
• If the demand for the product is price elastic, it is not a
good idea to raise prices and this will lead to lower
revenue
• If the demand for the product is price inelastic, then it is a
good idea to raise prices as it will lead to higher revenue
• Do you think price or product is the most
important element of the marketing mix for a
small business? Justify your answer 6marks
