Marketing Mix- Price Flashcards
Before setting a price, an organisation will need to consider:
● Competitors’ prices ● The position of the product in the product life cycle ● The cost of manufacture ● The time of year ● The target market for the product
Why is price important?
The organisation must ensure that it covers its costs (for example production, advertising) which will allow them to make a profit.
What are long term pricing strategies?
- low price
- high price
- Market price
Low price
- this strategy is often used to attract sales of products that have lots of competition
- This long term pricing strategy is set below the market price in order to attract customers
- Customers will often look for the product that is cheapest as a way of saving money. They will only do this if they see the product as value for money.
- Low prices can be associated with poor quality, even if this is not always the case. This might put some customers off buying a product.
High price
- Luxury products and premium brands are highly priced to appeal to certain consumers. Consumers are attracted to the exclusive, high end image.
- they may not rely on a large number of sales
- they will usually have a high profit margin on each sale
- it may be difficult to attract customers who may look for better value from the competition
Market price
This long term pricing strategy relies on setting your price at the same level as competitors and rivals. The business will then compete on other factors such as convenience, customer services or after sales service.
What is Cost plus pricing,
Advantages and
Disadvantages?
The business calculates the unit cost of a product and then adds a percentage markup for profit.
Advantages
- a quick and easy way of setting the selling price
- ensures that total costs are covered and a profit is generated
Disadvantages
- doesn’t cover indirect costs eg other expenses like rent
- doesn’t take external factors into account, eg increasing prices during boom periods to maximise profits
What are the short-term pricing strategies?
- competitive
- skimming
- penetration
- price discrimination
- destroyer/predatory (an illegal practice)
- loss leaders
- promotional
- psychological
Competitive,
Advantages and
Disadvantages?
-the price of a product is set similar to competitors
Advantages
- avoids price war
- encourages competition, which improves the market as a whole
Disadvantages
-other elements of the marketing mix must be better than the competitions to ensure sales
What is skimming,
Advantages and
Disadvantages?
-the price is set high to begin with and lowers over time
Advantages
- sufficient ‘hype’ around a new product enables higher prices to be charged, which can increase profits
- lack of competition also allows maximum prices to be charged
Disadvantages
- high initial prices can put off some customers
- technique results in low initial sales numbers
What is penetration,
Advantages and
Disadvantages?
-the price is set low to begin with and increases over time
Advantages
- encourages customer to try a new product
- the business hopes to gain repeat custom once the price rises
Disadvantages
- very little profit can be generated during the initial low price period
- could result in a price war if competitors set lower prices too
What is price discrimination,
Advantages and
Disadvantages?
-prices are altered depending on a discriminating factor eg different prices are often charged in the transport industry depending on age, such as child price, adult price and senior citizen price
Advantages
- ensures products appeal to different market segments
- allows for high profit margins on some price brackets
Disadvantages
- harder to budget for sales revenue in advance
- loss in potential revenue from selling at a cheaper price, eg a child taking a seat at a football match that could have attracted the full price from an adult
What is destoyer/predatory pricing,
Advantages and
Disadvantages?
-the price is deliberately set extremely low for a period of time to force out competitors
Advantages
- competitors are forced out of the market, then prices can increase again
- increases market share
Disadvantages
- can only be used by larger companies that can afford to make losses while prices are low
- this illegal practice could breach the CMA’s anti-competition regulations
What is loss leaders,
Advantages and
Disadvantages?
-a promotional price of one or more products is set unprofitably low to entice customers in to buy other products
Advantages
- brings customers to the business
- hopefully customers will buy normal prices products while buying loss leaders
- encourages repeat purchases
Disadvantages
-there is a risk that some customers will only buy the loss leaders, impacting on profits
What is psychological pricing,
Advantages and
Disadvantages?
-the price is set just below the next rounded number, eg £49.99 instead of £50
Advantages
- makes the customers think the product is much cheaper than it actually is
- products fit price bands customers have in mind, for example, pricing a car at £9,999.99 instead of the rounded up £10,000 means a customer looking for a ‘sub £10,000’ car would consider it and it would show up on internet searches
