Price Flashcards
Price
The amount of money that a customer has to give up to obtain a product or service
Competitor pricing
This is when a price is set based on prices charged by competitor businesses for a similar of identical product. Often lower in order to gain sales from rivals
Cost plus pricing
Adds a percentage to the cost of making a product to give the selling price. Easy to do as not very time consuming, but doesn’t take competition or elasticity into account
Price skimming
Where product is more advanced than that of competitors and/ or customers want to associate with a particular brand, and therefore a price is set high because customers are willing to pay higher prices to own that product
Marginal pricing
Based on the assumption that since fixed and variable costs are covered by the current output level, the cost of producing any extra unit (marginal output) will compromise only the variable costs, hence any amount by which the selling price exceeds the variable costs incurred by the marginal output, profit will be made.
Contribution pricing
Involved setting a price based on the variable cost of producing or buying a product. The aim is to ensure the selling price generates an acceptable contribution towards covering the fixed costs of the business
Penetration pricing
When a business is new to the market, a price is set lower than competitor businesses. This is a short - term strategy to help break customer loyalties from trusted brands
Psychological pricing
Designed to appeal to customers who use emotional rather than rational responses to pricing messages. E.g. they’ll buy something that £9.99, but think £10 is too much. Or £12995 rather than £13000
Elasticity formula
% change in demand divided by % change price
What does it mean if elasticity is over 1, 1, between 0 and 1, and 0
Over 1- Elastic in relation to price change
Between 0 and 1- inelastic in relation to change
1- demand is unit elastic
0- demand is perfectly inelastic
Income elasticity of demand (formula)
% change is quantity demanded divided by % change in income
What does it mean when income elasticity is more than one, and income elasticity is between 0 and 1 and when income elasticity is negative
1- luxury product (income rises, demand rises)
Between 0 and 1- necessity product
Negative- inferior good (income falls, demand rises)
Cross price elasticity of demand (formula)
% change in demand for good X divided by % change in price of good Y
What does it mean when XED is negative or positive
Positive- substitute (switch in demand elsewhere)
Negative- complement (e.g. games and console)
Limitation and benefits of elasticity
Useful because it can help marketers decide whether/ how much to increase/ decrease prices by
However It assumes you know what will happen to demand as a result of a change in variables. This information won’t always be available or accurate. It will also difficult to predict with a new product as previous data will be limited
