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TOPIC SUMMARY
1. What is Price?
● Pricing is the method of determining the value a producer will get in the
exchange of goods and services. Simply, pricing method is used to set the price
of producer’s offerings relevant to both the producer and the customer.
• Costs of production
• Marketing mix
• Competitors’ prices
• Target market
• Decide on price
7. Pricing Methods
• Cost based pricing – Full cost pricing – Mark up pricing – Contribution pricing.
• Customer perceived value – What customers value the product at – Price is set
at an estimate of the product’s value to customers.
• Psychological price barriers – A price beyond which customers will not go –
Prices are set based upon the psychological expectation of customers about
price.
• Going rate pricing – Price set after taking competitors into account – Method
favored by new entrants to a market since it avoids price wars – Makes use of
the expertise of established firms But it assumes that competitors set the correct
price and it ignores the fact that firms have different cost bases.
9. Who takes the lead? Price takers have no option but to charge the ruling market
price.
● Price makers Able to fix their own price leaders Market leaders whose price
changes are followed by rivals Price followers follow the price-changing lead of
the market leader.
• Price is set by calculating the full costs (variable/direct plus fixed/indirect cost)
of a product and adding a profit margin.
• It is relatively easy to calculate the direct costs, but some way has to be devised
to allocate the indirect costs.
• Strategies for existing products – Price leaders, price followers and price taker –
Pre-emptive pricing – Price discrimination.
• Works very well for products that create excitement amongst “early adopters”.
• Aim is to – Gain market share quickly – Build customer usage and loyalty.
• Unlike skimming the high price is maintained throughout the life of the product.
● High price
● Medium Low price
● High quality Premium
● Penetration Superb value
● Strategy Medium Overcharging Average
● Good value quality
● strategy Low quality
● Rips off Cheap,
● Bargain price strategy
● flashy strategy.
• This strategy is especially suitable in markets where there are few other barriers
to entry.
• Time based discrimination - peak/ off peak pricing used in transport & travel
-Predatory pricing
• “Predatory pricing occurs when a dominant undertaking incurs losses with the
intention of removing a rival and/ or deterring other potential competition” (OFT).
-Price wars
• Each seeks to increase market share by price reduction but the result is
destructive spiral of price reductions
• Price wars might be seen as good for customers in the short run but it is
harmful in the long run if competition is reduced.
- Psychological pricing
• In this case consideration is given to the psychology of prices and not simply
the economics of pricing.
• A loss leader is a product prominently displayed and advertised and price below
the normal price and even below cost to the seller.
• A product which is sold at a low (even loss making) price in order to encourage
customers to buy other full price products from the business along with the loss
leader product.
• Loss leaders are widely used by supermarkets to draw in customers from rival
firms.
● Type of Whom for? Discount Cash For those who pay cash Quantity For
customers
● Who buy large volumes (bulk buying) Trade Intermediaries in the trade Seasonal
for buying off peak or out of season.
● Promotional Temporary pricing of products list price to increase short run sales.
• When demand is elastic, a price rise leads to a more than proportionate fall off
in quantity demanded.
• When demand is inelastic, a price rise leads to a less than proportionate fall off
in quantity demanded.
• And a price reduction will lead to such a large increase in sales volume that
sales revenue raises.
• Conclusion: when demand is elastic, price and sales revenue move in opposite
directions.
• When demand is inelastic (not very responsive to price changes), a rise in price
will result in only a small reduction in sales volume that sales revenue rises.
• And a cut in price produces such a small increase in sales volume that sales
revenue falls.
• Conclusion: when demand is inelastic price and sales revenue move in the
same direction. Repeat