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PRICE

Business Marketing

TOPIC SUMMARY

1. What is Price?

• The money charged for a product or service.

• Everything that a customer has to give up in order to acquire a product or


service.

• Usually expressed in terms of £.

● 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.

2. Four views of price Economists

● View Price is set by the forces of supply and demand.


● Accountant’s Price should cover costs so that a view profit can be made.
● Customer’s view Price has to represent good value.
● Marketer’s view Pricing is an opportunity to gain a competitive advantage.

3. Many Factors Affect Price

• Costs of production

• Marketing mix

• Competitors’ prices

• Stage in the product life

• Customer perception of cycle value

• State of the economy

• The firm’s objectives

• Expectations of Customer demand distributors


• Price elasticity

• State of competition in demand the market

• Target market

• Likely reaction from customers

4. Stages of price setting

• Develop pricing objectives

• Assess of target market’s ability to purchase

• Determine demand for product

• Analyze demand, cost and profit relationship

• Evaluate competitors’ prices

• Select pricing strategy & tactics

• Decide on price

5. Some Pricing Objectives Financial Marketing Maximize profit Maintain/improve


market Achieve a target level of share profits Beat/prevent competition Achieve a target
rate of Increase sales return Build a brand Maximize sales revenue Improve cash flow.

6. Methods strategies and tactics pricing method

● The method used to calculate the actual price set.


● Pricing Adopted over the medium to long strategies term to achieve marketing
objectives.
● Have a significant impact on marketing strategy.
● Pricing tactics adopted in the short run to suit particular situations.
● Limited impact beyond the product itself.

7. Pricing Methods

• Market based pricing – Customer value pricing – Psychological price barrier –


Going rate .pricing.

• Cost based pricing – Full cost pricing – Mark up pricing – Contribution pricing.

8. Market based methods

• 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.

10. Cost plus pricing

• Full cost of making the product plus a % mark up.

• 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.

11. Pricing Strategies

• Strategies for new products – Skimming – Penetration.

• Strategies for existing products – Price leaders, price followers and price taker –
Pre-emptive pricing – Price discrimination.

12. Price Skimming

• Set a high price to maximize profit.

• Product is sold to different market segments at different times.

• Top segment is skimmed off first with the highest price.

• Objective – Maximize profit per unit to achieve quick recovery of development


costs.

• Works very well for products that create excitement amongst “early adopters”.

• Best used in introduction or early growth stage of product life cycle.


• Electronic items provide many great examples.

13. Penetration pricing

• Introduce a new product at a lower price than competitors.

• Aim is to – Gain market share quickly – Build customer usage and loyalty.

• Opposite of price skimming• Price is raised once target market share is


reached..

14. Prestige pricing

• High price to enhance or reinforce a product’s high quality, luxury image.

• Unlike skimming the high price is maintained throughout the life of the product.

• Examples: Channel, Bang and Olsen, Cartier, Lotus.

15. Price quality matrix

● 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.

16. Pre-emptive pricing

• Setting prices low to deter new entrants to the market.

• This strategy is especially suitable in markets where there are few other barriers
to entry.

• Pre-emptive pricing should not be confused with predatory pricing.


17. Price discrimination

• Charging different prices to different market segments, based on customer


willingness to pay.

• Time based discrimination - peak/ off peak pricing used in transport & travel

• Geographic discrimination – e.g. cars are cheaper on mainland Europe than in


the UK.

• Age discrimination - reductions for the young and the old

18. Pricing tactics

Unlike pricing strategies, these refer to the short run:

-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).

• This anti- competitive practice is used when competitors threaten to reduce


market share and profitability.

-Price wars

• Competitive price reductions by firms in a competitive industry.

• Each seeks to increase market share by price reduction but the result is
destructive spiral of price reductions

• The process continues until weaker firms go out of business.

• 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.

• Charging at a price which ends in 99p is a way of deceiving people into


believing that the product is cheaper than it really is.
- Loss leader

• 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.

• The aim is to encourage people to buy complementary goods at full price.

- Promotional pricing and discounts

● 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.

- Price Elasticity of Demand

• The demand curve slopes downwards.

• This means that the quantity demanded falls as price rises.

• To increase the quantity sold, it is necessary to reduce the price.

• Price elasticity of demand refers to the responsiveness of demand to changes


in price.

• 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.

- Elastic demand and sales revenue

• When demand is elastic (responsive to price changes), a rise in price leads to


such a falloff in quantity sold that sales revenue falls.

• 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.

-Inelastic demand and sales revenue

• 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

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