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?
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?
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.
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.
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.
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.