Section Three - Marketing Decisions - Marketing Mix (price)

Question 1

What factors affect pricing decisions?

Answer 1

• Affected by the rest of the marketing mix
• price is set covers the costs of making the product and make a profit
• Must be acceptable to customers - depends on price sensitivity
• PED
• Stages of product life cycle
• Has to be in line w/ company objectives
• Price of competition

Question 2

Explain price skimming.

Answer 2

1) When new and innovative products are sold at high prices when they first reach the market. Consumers will pay more because the product has scarcity value, and the high price boosts the product’s image and increases its appeal. Technological products, e.g. computers, tend to be priced using this method.
2) Prices are usually then dropped considerably when the product has been on the market for a year or so
- by this point everyone prepared to pay extra for being one of the first to own the product has got one.
Also, competitors will have entered the market with imitative products at lower prices - unless a company can prevent this by using patents or trademarks.
3) Some companies use price skimming as a long term strategy to keep their brands more exclusive, e.g. Apple® and Ray-Ban® sunglasses.
4) However, potential customers can be put off by the initial high price and customers who bought the product at its initial price may be annoyed and frustrated when it suddenly drops in price after launch.

Question 3

Explain penetration pricing

Answer 3

1) Penetration pricing is the opposite of skimming. It means launching a product at a low price in order to attract customers and gain market share. It is especially effective in markets which are price-sensitive, e.g. a new washing powder or food product.
2) Penetration pricing works best for companies that can benefit from lower costs when manufacturing large quantities of a product.
3) A problem with penetration pricing is that customers expect the low price to continue, so it’s difficult to raise it without losing customers. It can also damage how the brand image is perceived.
4) Price penetration isn’t just for new products - it can be used as an extension strategy to prolong a product’s life (see page 45).
5) Penetration can also be used to target a more budget-conscious market segment. E.g. an airline might set up a no-frills, low-cost service in addition to its regular service. That way they can keep their existing customer base who are prepared to pay more, as well as maintaining their premium brand image.

Question 4

What is dynamic pricing?

Answer 4

Dynamic pricing aims to increase revenue by changing prices depending on competitor prices and demand.