Strategy: Pricing methods - cost based, competition based, market based - pricing strategies - skimming, price penetration, price points, loss leaders, price and quality interaction Flashcards
Pricing methods
A business’s pricing decisions are influenced by internal and external factors. As a starting point, the businesses marketing objectives and costs of production provide an indication of what it should charge for its products. The business must consider such factors as the amount of competition in the marketplace, government regulations, and the location of the product on its life cycle and the level of economic activity.
Cost based competition
Is a pricing method derived from the cost of producing or purchasing a product and then adding a mark-up.
Advantage - Simplest pricing method to apply. Used by many retailers and wholesalers.
Disadvantage - Difficulty in determining an appropriate mark-up. Product is priced based on production costs so doesn’t consider other parts of the marketing mix or state of the market.
Competition based
Is where the price covers costs and is comparable to competitors
Advantage - equal to that of competitors.
Following the
price established by a price leader is
Disadvantage - May not generate high enough profits if the other businesses are cost leaders and this business operations process is costly
Market based
Instead of using costs to determine price, businesses sometimes set prices according to the level of supply and demand — whatever the market is prepared to pay. Market-based pricing is a method of setting prices according to the interaction between the levels of supply and demand.
Advantage - When demand for a product is greater than its supply, there will be a shortage in the market. This will force up the price of the good.
Disadvantage - conversely, when the supply of a product is greater than its demand, a surplus
will exist in the market. The price of the product will consequently fall. This is why bananas are cheaper, for example, during the summer months.
Messina pricing method
Messina uses Cost-based to cover expenditure and quality measure
Messina gelato utilises cost based marketing to cover all expenditure on ingredients and ensure a profit is achieved. Cost based marketing refers to meeting the cost of producing or purchasing a product and then adding a mark-up. The benefits of cost based marketing are evident for messina, as the business owns all their milk and dairy farms which is extremely expensive but as a result of cost based marketing messina doesn’t have to concern over covering the cost of production and its ensured from the products they sell. Moreover, by adding a percentage to markup the business can continue practises and innovate techniques with the extra money gained from the markup.
What is price
Price refers to the amount of money a customer is prepared to offer in exchange for a product.
A price set too high could mean lost sales unless superior benefits are offered.
A price set too low may give customers the impression that the product is ‘cheap’.
Somewhere between these extremes is a correct price for a product. In any market, businesses will attempt to gain some control over the price by differentiating their products.
Price strategies
Skimming, Penetration, Loss, Leaders, Price points
Skimming
Occurs when a business charges the highest possible price during the introduction of the life cycle
Advantage recover cost of research and development quickly
Disadvantage competitors quickly create/alternative cheaper products
How to Use Price Skimming the Right Way E.g. Apple
when apple introduces a new apple phone the prices is high until the latest model comes out and the price drops
Price penetration
occurs when a business charges the lowest price possible for product during the introductory stages of life cycle
Advantage quickly achieve significant market share for a product
Disadvantage more difficult to raise price than lower it
New product pricing at IKEA
aim to lower price of production
Loss Leaders
It is a product sold below or at cost price
May relate to special promotion in a retail store or when overstocked
Advantage attract customers to store in the hope they buy additional products
Disadvantage if not managed carefully will lead to profit loss for the business
IKEA sells food at a loss
selling at the price it cost me to make or even lower
e.g. IKEA restaurant is loosing them money but enhances the customers stay in the store and their experience
Price points
Is selling products only at a certain predetermined price
Advantage - generally limits the number of price points in a retail store to make it easier for customers to find the type of product they want
Disadvantage price was not based on mark-up needs to be managed carefully to ensure consistent profit
Prices ending in 99
rather than selling at $50 the business sells at $49.99
Price quality interaction
This perceived price–quality relationship helps determine the image customers have of products or brands.
High priced goods - superior quality - high manufacturing costs -quality and status Low priced goods - low quality - low manufacturing costs - perceived as cheap
This price–quality relationship does not apply to all products. Usually, high priced and infrequently purchased items such as cars, homes and furniture display a stronger price–quality relationship than frequently purchased products such as grocery items.
As well, consumers may believe that high prices reflect either expensive packaging or market exploitation. This may lead to a reduction in sales because the consumer perceives there to be little actual difference between the quality of a low- and high-priced item.
Sometimes, a premium price is set artificially high to imply a prestigious or quality image when, in reality, the quality may not be much superior to cheaper alternatives.
Price quality interaction IKEA
There is an assumption that price correlates directly with the quality of a product, IKEA challenges this ideology by offering low priced products for high quality materials. IKEA, utilises cost leadership to find the cheapest alternatives in productions that limits waste expenditure and promotes quality operations. IKEA proves their quality with product warranties, their kitchen set has 25 year warranties that guarantees if the product is faulty consumers will either be refunded or have repairs for free. As a result customers feel supported in their decision to buy the product and have assurance the quality will last for at least 25 years.
