The amount paid by a customer for a good or service.

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  • Created by: sonny
  • Created on: 21-05-11 14:25

How to set the price.

Price gives an important message to customers about the product in terms of quality and value of money. It is a key aspect of the purchasing decision.

  • Costs - This is key to survival and profit!
  • Demand - e.g. popularity of the product.
  • Supply - How many competitors are in the market and what are their prices?
  • Prices elasticity of product - Do people consider it essential?

Key words:

Pricing Stratagies: Long-term pricing plans whihc take into account the objectives of the business and the value associated with the product.

Price Skimming: entering a market with a high price to attract early adopters and recoup high development costs. For example the Iphone.

Penetration pricing: entering a market with a low price to gain customer loyalty then increase the price. For example?

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more key words

Two pricing stratagies for existing products:

Price leader: a product that has significant market share and can influence the market price.

Price taker: a firm which sets its prices at the same or similar level to those of the dominant firm in the industry.

Pricing tactics are short-term pricing plans designed to achieve a particular short-term objective.

Loss leaders: products sold at less than cost to attract customers to as a product range e.g. razors and blades.

Psychological pricing: the use of prices that make the product sound cheaper. E.g. £99 instead of £100 and 99p instead of £1.

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Influences on pricing decisions

  • Costs of production - it is important to cover costs unless it is a loss leader or predator pricing approach. To do this a method of cost-plus pricing is used i.e. firms add a percentage above the unit cost.
  • Competitors - what price are they charging?
  • The market - dynamic markets such as technology.
  • The target market - how much are they willing to pay?
  • The other elements of the marketing mix.


Price elasticity of demand is the responsivness of demand when the price has changed. 

Elastic demand = prices reduce by small percentage - quantity demanded rises by a larger percentage. Examples of elastic products are clothes, cars, tvs and food.

Inelastic demand = prices reduced by large percentage, quanitiy demanded rises by a smaller percentage. Examples of inelastic products are desiger clothes and necessities such as gas and petrol.

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PE = percentage change in demand divided by percentage change in price.

Figure over 1 - elastic demand

Figure below 1 - inelastic demand

A firgure of zero (unity) - this is rare and means the change in price is exactly offest by the change in demand i.e. revenue of the firm will be unchanged.

Price elastic = A rise in price leads to a fall in sales revenue. A fall in price leads to a rise in sales revenue. Profit may increase but this will depend on the costs of the business.

Price inelastic = a increase in price leads to a increase in revenue and a increase in profit (fewer units = lower costs of production.)

A fall in price leads to a fall in revenue and a fall in profit.

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What makes a product price elastic?

  • The more subsititues there are i.e. more choice for customers to choose from.
  • The greater the knowledge of alternative products that the cusomer could swap to.
  • The easier it is to switch products.

What makes a product price inelastic?

  • The more necessary a product is
  • The level of income a person spends on the product. A cheap product such as a newspaper tends to be price inelastic.
  • The greater the level of brand loyalty towards the product.
  • A USP or unique location.
  • Reduce compeition e.g. Microsoft

Firms want to be price inelastic because this allows them to charge a higher price and make less output.

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