Chapter 55- price Flashcards
Price
- Price of a product tells you the value and quality of the product
- Price is used to compare products by consumers
- Depending on the price it will dictate the revenue earned
- price Must fit in with the rest of the marketing mix
- pricing will dictate where the product is sold
Prices is viewed differently on stakeholders
- Finance department wants price to yield high profit
- Marketing wants a price to establish the product
- Consumers want value for money
- Shareholders want our return on their investment
Factors affecting price
- Objectives of the business
- Cost of producing a good
- Level of demand within the market
- Level of competition within the market
- Stage in the product life cycle
Market forces
- market forces determine the price of any good
- They consist of supply and demand
- when price rises the demand for the product falls due to affordability
- when price rises suppliers will want to supply more to the market
- price charged will depend on market forces
- the point that demand and supply intersect represents the equilibrium price
Price elasticity
- It measures the response of demand to a change in price (price elasticity of demand) or income (income elasticity of demand)
When a price changes the level of demand will also change
how much depends upon:
- nature of the product (necessity or luxury)
- level of price change
- Income of consumer
- importance of product to consumer
Elastic demand
- large price increase
- Purchase can be postponed
- Large number of substitutes
- Low on preference list
- Low level of consumer income
- luxury good
InElastic demand
- small price increase
- purchase can’t be postponed
- very few, if any substitutes
- high on preference list
- high level of consumer income
- necessity
What is the rate of change referred to as?
The elasticity of the product
Inelastic
- Price changed does not affect demand much
Elastic
- small change in price does affect demand in big way
How is price elasticity of demand calculated?
% change in quantity
————————
% change in price
Price inelastic
<1 and <0
Price elastic
> 1
Income elasticity of demand
- It measures the response of demand to a change in income
- when income goes up then demand goes up
What the income is spent on will depend:
Elastic demand:
- inferior goods (demand down as income rises)
- luxury goods
- large increase in income
- consumers income is low
InElastic demand:
- necessities
- small increase in income
- consumers income is high
Formula for calculating income elasticity of demand
% change in demand
——————-
% change in income
Cross elasticity of demand
- Shows how the change in price of one good will affect the demand of another good
- if price of one type of product goes up then demand for substitutes will rise
- Where cross elasticity is low the know the connection between goods
- If goods are complimentary then high cross all elasticity demand occurs
Formula for calculating cross elasticity of demand
- % change in demand for product a
—————————
% change in the price of b
Pricing strategies
- Getting the price right is not easy
- Once the business objectives are clear then they can decide on the pricing strategy
Skimming
- Business set a high price for the product/service
- Makes lots of profit quickly
- Used on shortlife products
- Others will enter the market which decreases the price
- Prices start high and then fall
Penetration pricing
- Used to establish a new product in the market
- Gain a share of the market
- low price set attract customers
- Lots of advertising to highlight price
- Once established the price may rise
Premium pricing or prestige pricing
- A high price is set for a product/service to create an image to state high quality
- As competition increases, it reduces its prices
Psychological pricing
- Set a price that sounds less than what it is
E.g. 99p rather than £1
Loss leaders
- Used to get customers into the premises
- for examples spend £50 and get 2p off
Competition based price
- Set price below that of its competitors
-aim to get more sales and beat them - a short term pricing strategy until competitors respond
Predatory pricing (destroyer pricing)
- Seen as being anti-competitive
- Used by established companies to combat new entrants
- Happy to make a loss to make it hard for new entrants to compete
- Aim is to force it out of business
Market based pricing (going rate pricing)
- if similar product to others on the market then prices set based on what the market price is
Promotional pricing
- BOGOF
- 3 FOR 2
Cost plus
- a way of actually setting a price to be charged to the customer
- usually involves adding all the costs of the product and adding a percentage on top
- Markup is the amount added to the total cost to get selling price
- Profit margin is a percentage of profit of the selling price
Contribution or marginal cost pricing
- Fixed cost and overheads are ignored and only variable costs are considered
- Contribution is selling price minus the variable costs of making it
- Once variable costs are covered the contribution is used to fixed costs
Price discrimination
- Occurs when different prices are charged for the same product or service within different markets
What can price discrimination be based on?
- Area
- time
Service marketing
- Similar rules will apply in the service sector also
- booking a flight and need a cheap flight will use a cheap carrier
- Looking for best value for money therefore may use a national carrier
