F293 - Marketing: Price
- Created by: Neelam
- Created on: 11-12-12 10:22
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
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.
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
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
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
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
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
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+
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
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
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
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
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
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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