Ch 18 The marketing mix – price Flashcards
How do managers determine price?
- Cost of production: price must cover all of the costs producing it
- Competitive conditions in the market: if the firm is a monopolist, it is likely to have more freedom in price setting
- Competitor’s price
- Business and marketing objectives: profit maximisation or increasing sales
- Price elasticity of demand
- Whether the product is new or existing
What are the pricing strategies?
- Price skimming
- Price penetration
- Competitive pricing
- Psychological pricing
- Cost plus pricing
- Price discrimination
- Predatory price
Define cost-plus pricing
Adding an additional amount to the cost of the production means that profit per product is easier to work out
Advantages of cost-plus pricing
- Easy, fast and common way to calculate
- Ensures that all your cost are covered
Disadvantages of cost-plus pricing
- Does not take into account what the customers are willing to pay for the product -> reduced profit
- Does not look at what the competitor’s price
Define competitive pricing
This is when the price reflects what the competition are doing and the product is priced competitively
Advantages of competitive pricing
- Can change customer’s opinion on different companies
- Selling prices are in line with rivals => customers will consider other factors such as quality before purchasing it
Disadvantages of competitive pricing
- Business have to attract the customers in other ways, since the price isn’t the only factor that grabs customers’ interest
- May only just production costs, resulting in low profits
Define price skimming
A high price is used to enter the market and is skimmed off. This means that the business makes a lot of profit before competitors can enter the market. Often used by businesses dealing with technology
Advantages of price skimming
- Help the company in covering R&D cost
- Very profitable if consumers care about quality rather than price
Disadvantages of price skimming
- May slow down the volume growth of demand
- Can’t last long as competitors soon launch products with lower price
Define price penetration
A low price is used to enter the market and build up customer loyalty. Once customer loyalty is earned, the price increases
Advantages of price penetration
- Catching the competitor off guard
- Encourage word of mouth recommendation
- Force business to focus on minimising costs from the start
- Sales volume should be high -> distribution may be easier to obtain
Disadvantages of price penetration
- Simply attract customers who are looking for a bargain rather than loyal customers
- Retaliation from established competitors
Define psychological pricing
Setting a price that seems cheaper than it really is
Example; 2.99, 99.99
Advantages of psychological pricing
- Make the customer believe that the product is cheaper than it really is
- Allows the business to influence the way customer view the product without the need to change the product
Disadvantages of psychological pricing
- Calculation complication and mistakes can be made
- Some people still take efforts to calculate prices carefully -> may not work on all individual
Define price discrimination
Different prices are set for different customers or when a service is used at different times
Advantages of price discrimination
- Able to increase revenue
- Making the products more affordable to everyone, some customers may benefit from lower price e.g. elders, babies
Disadvantages of price discrimination
- Some has to pay higher => unfair
- Decline in consumers surplus
- Maybe administration cost increase because the company has to separate the markets
Define predatory price
This is when the price is set deliberately low in order to drive competitors out of the market. This type of pricing may result in price war
Advantages of predatory price
- Entry barrier: prevent new entrants to the market because the business will be able to dominate the market
- Drive competitors out of the market or drive weaker competitors into smaller niches within the market
Disadvantages of predatory price
- May be illegal in some places
- Might make a loss due to the inability to cover costs
- Can work in the short term but may not be in the long term
Define price elasticity of demand
- Measures the responsiveness of demand following a change in price
- percentage change in quantity demanded/ percentage change in price
When is it price elastic?
- Beyond -1, e.g. -2, -3, -4
- A price change = a bigger change in quantity demanded
- %change in quantity is greater than % change in price
When is it unitary price elastic?
- Numerical value: -1
- A price change = the same change in quantity demanded
- % change in Q is the same as % change in P
When is it price inelastic?
- Between 0 and 1. e.g. -0.2, -0.3, -0.4
- A price change causes a smaller change in quantity demanded
- % change Q is smaller than % change in P
What are the determinants of PED?
- Availability of substitutes - the more substitutes, the higher the PED
- How necessary the product is 0 the more necessary, the more inelastic
- Competition
- Level of consumer loyalty - inelastic
- The price of the product as a proportion of consumers’ incomes
Applications of PED
- Making more accurate sales forecast
- Assist in pricing decisions
- Marketing - needs to know for planning purposes what may happen to its demand if it changes price
- Branding - businesses try to make the demand for their products more price inelastic through advertising and branding
Limitations of PED
- PED assumes nothing else has changed. e.g. competition
- PED calculation becomes outdated quickly as businesses operate in a dynamic environment
- It is not always possible to calculate PED
