F293 - Marketing: Price

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Factors that affect price

Marketer's view pricing as an opportunity to gain a competitive advantage

Factors that affect price:

  • Cost of production
  • Competitors price
  • firms objective
  • Marketing mix
  • Target market
  • Customer demand
  • Customer perception of value
  • State of economy
  • Price elasticity of demand
  • Stage in product life cycle
  • Expectations of distributors
  • Objective of the business
  • Economic environment
  • Customers income
  • Stage in the product life cycle

 

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Pricing

The price of a product or service indicates both its value  and its qualityThe price that a business fixes for its products will determine the level of revenue that is earned. The price has to fit with the marketing mix. The image of a product is influenced by its price. Pricing can be viewed from different perspectives by different departments therefore the stakeholders all have some input on the eventual price of a product.

As prices rise, the demand for goods and services fail

  • competitors can no longer afford it
  • suppliers are more willing to supply goods

The place where supply meets demand is known as the equilibrium price.

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Advantages of setting Prices

Setting prices help to:

  • Develop pricing objectives
  • Assess of target market ability to purchase
  • Determine demand for product
  • Analyse demnad, cost and profit relationship
  • Evaluate competitors' prices
  • Select pricing strategy & tactics
  • Decide on price

 

Financial: Main reason for pricing objectives is to maximise profit and target rate of return and a target level of profits. It also maximises sale revenue and improve cash flow.

Marketing: It also maintain/improve market share, beat competitors, increase sales and build a brand

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Pricing Methods

Market based pricing:

Customer value pricing - value the product at

Psychological price barrier - a price customers will not go over

Going rate pricing - competitors offer; expertise of established firms

Cost based Pricing:

Full cost pricing

Mark up pricing

Constribution pricing

little profit

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Cost Plus Pricing

% mark up - direct cost plus an amount to cover indirect costs. This is widely used in retailing

Calculating the full costs (variable/direct plus fixed/indirect costs) of a product and adding a profit margin

Advantages:

  • Price increases can be justified when costs rise
  • Passed on easily to consumers
  • All costs covered
  • Price stability may arise if competitors take the same approach

Disadvantages:

  • Ignores demand & price elasticity of demand
  • Ignores competition
  • Less incentive to control costs
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Price Elasticity

Elasticity measures the responce of demand to a change in price (Price Elasticity of demand) or income (income elasticity of demand)

Price elasticity of demand (PED)

When the price changes the level of demand will also change dependent on a number of factors:

  • nature of the product
  • level of price change
  • income of the consumer
  • consumer's preference scale

All of these factors are to be considered when a business decides to change their prices.

The rate of change is referred to as the elasticity of the product

INELASTIC = NECESSITY

ELASTIC = LUXURY GOODS 

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Price elasticity continued

An inelastic product will withstand price increases, as demand will not change by very much.

If a product is more price sensitive (elastic), even small changes in the price could affect demand significantly.

Formular for determining the price elasticity of demand:

Percentage change in price ÷ Percentage change in price

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Income Elasticity of demand

This measures the response of demand to a change in income

When income increases the level of demand increases - consumers have more spending power/disposable income

Formula for determining the income elasticity of demand is:

Percentage change in demand ÷ Percentage change in income+

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Skimming

The business sets a high price for its goods or services in an attempt to gain profits quickly; often when there are high research costs

Used for products that have a short life cycle - as it is a necessary to gain maximum benefits when postitive.

Other businesses may note the high returns made by a specific business, may also enter the market forcing the price of goods to go down

Starts off with a high price which may eventually reduce

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Penetration Pricing

Helps establish a new product in the market and gain a share of the market

Initially starts with a low price to attract customers

Heavily advertised; introducing the introductory low price

Price increases once a reasonable share of the market has been achieved or loyal consumers are gained

Level of price increase will depend on the desire price compared to the introductory price

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Premium Pricing/ Prestige Pricing

High price set to indicate an image of high level quality

Reduces prices if competition increases

Psychological pricing

Setting a price that sounds less than it really is

difference in price is often minute

encourages consumers to purchase

Loss Leaders

Entice customers into a particular retail outlet i.e. supermarkets

Aim to make consumers buy on impulse

The sales will compensate for the losses made on the loss leaders

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Competition-based pricing

- Setting the price below its competitors

- Gains additional sales and 'beats' its competitors

- Short - term pricing policy to gain additional sales until the competitors respond

Predatory Pricing

- When an established business responds to a new business entering the market by reducing its prices (often to incur a loss in the short term).

- A new entrant will find it impossible or very difficult to compete especially as it won't be able to make cost savings due to a lack of economies of scale

- The new business is able to 'force' the new entrant out of the market

- Occasionally attempted with established rivals, but such price wars are often only short-lived or used as a form of promotional campaign or even loss leaders

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Market-based pricing (Going-rate pricing)

When products are very similar or even identical (homogeneous) a business will take its price from the market

Promotional pricing

-BOGOF, price reductions, 3 for 2, loss leaders

-Used at any stage of the product life cycle

-Maintains high levels of sales

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Cost Plus

Setting the price to be charged to the consumer

Costs refer to the expenses of producing the product, materials used, labour, advertising, etc.

Cost must be less than selling price

Mark-up when an amount (usually a %) is added to the total costs to gain the selling price

The profit margin is the level of profit expressed as a percentage of the selling price

Selling price - cost = Ans ÷ selling price x 100 = Profit Margin

Price Discrimination

Charging different prices for the same product/service within different markets

Depends on Age, Time & Area

 

 

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Comments

davidsalter

This is a set of 14 revision cards which detail the various pricing policies that are used by businesses. It also includes elasticity. Useful for students who prefer to read from cards.

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