7. Price Flashcards
• Role and perception of price • Price setting • Internal and external influences on pricing • Pricing Calculations
What are the main external influences on pricing decisions?
Consumers
- prices should be set within the boundary of the highest price tolerated by the consumer and the lowest price the company can tolerate given its costs.
Demand and Price Elasticity
- classic demand curve: price is determinant, upward sloping
- however other factors influence such as changes in income and tastes, nature of good
Channels of Distribution
- pricing decision should take into consideration the needs of other members of the distribution chain
- each have profit margin and cost requirement
Competitors
- positioning ans strategic decisions
- influence depends on the nature of the product and number of competitors
Legal Framework
- duties, taxes
Marketing Mix
- must be consistent
Explain demand in terms of choosing a pricing strategy
Price
- classic demand curve
- boomerang demand curve
Nature of the good
- PED
- luxury/ normal/ inferior
Consumer tastes/ preferences
- trends
- innovation
Availability of substitutes
- innovation
- price
Explain cost-based pricing
emphasis on the organisation’s production and marketing costs
Mark-up
retailer adds a fixed percentage to cost to make the retail price
e.g. fmcg, where demand is unpredictable for lines
Cost-plus
fixed percentage added to production/construction costs (agreed by buyer + seller beforehand)
e.g. large projects, custom built items
Experience curve
as firm grows in experience, firms can charge lower prices.
Some firms use this as part of the price-planning process
+ simple method
- lack of focus on external situation, may not be in line with competitors
Explain demand-based pricing
Focus on customers and their response to differing price levels
when demand is strong, price goes up and vice versa
Explain competition-based pricing
The more differentiated a product is, the more power an organisation has in pricing it.
Relies on competition analysis and perceived value of product
Influencing pricing decisions: Demand and price elasticity
PED = %change in Q / %change in P
Determines the sensitivity of the market demand to changes in price
Closer to 0 means more inelastic
More available substitutes can make the PED more elastic (sensitive)
Pricing decisions in different market structures
Monopoly
- rare
- have freedom to set price where they like as there are no competitors however often regulated to ensure fairness for consumers
- steel, coal, telecommunications
Oligopoly
- firms dependent on prices of other firms
- collusion may occur and all participants will want to avoid price wars
Monopolistic Competition
- many competitors, differentiated products
- focus on non-price competition
Perfect Competition
- firms have no ability to affect price
Boomerang Demand curve
Where there is higher demand at higher prices as there is further meaning to the good e.g. it conveys social status
Therefore, if everyone could afford it then it would not have the same meaning
Examples are products in the medium-high price range, such as fragrances or fashion restaurants, where the customer spends occasionally a large sum of money to feel closer to a world of luxury and sophistication
What are the internal influences on pricing decisions
Organisational Objectives
- target sales volumes, revenues, profits, growth
- position in market relative to competition
Marketing Objectives
- whole marketing mix, not just price
- PLC
Costs
- often predicted
- unpredictable environment
Sales and marketing objectives
Increasing market share
- low prices
- may lead to price war
Volume sales
- maintaining manageable levels of stocks
- i.e. to prevent stock pile-up
Status quo
- preserve market share
- price matching as opposed to undercutting
New Product Pricing: Penetration
Aggressively low price to achieve high sales volume in short time period
useful in markets where demand is elastic and dependent on price
New Product Pricing: Price Skimming
High price to target the least price-sensitive
May be those who seek status
+ allows company to achieve quality brand image
Pricing tactics and adjustments
Price structures give guidelines to sales representatives to help in negotiating a final price with the customer.
Pricing tactics are the final steps used in arriving at a final price.
A special adjustment is a variation on a price structure.e.g. discounts
