The Marketing Mix: Price

• When deciding a price for either an existing product or a new product, the business must be very careful to choose a price which will fit in twith the rest of the marketing mix for the product. Business must be careful when considering a pricing strategy for the specific type of product being sold to consumers.

Pricing methods

Cost-plus pricing

• DEFINITION: The cost of manufacturing the product plus a profit mark-up. It involves estimating how many units of the product will be produced, calculating the total cost of producing this output, and adding a percentage mark-up for profit.
  • Benefits:
    • Easy to apply the method.
    • Different profit mark-ups could be used in different markets.
    • Each product earns a profit for the business.
  • Limitations:
    • If the selling price is higher than competitors’ prices, businesses can lose sales.
    • A total profit will only be made if sufficient units of the product are sold.
    • No incentive to reduce costs. Any increase in costs is just passed on to the customer as a higher price.

Competitive pricing

• DEFINITION: When the product is priced in line with or just below competitors’ prices to try to capture more of the market.
  • Benefits:
    • Sales are likely to be high since the price is at a realistic level and the product is not under- or over-priced.
    • Avoids price competition, reducing profits for all businesses in the industry.
    • Used when it is difficult for consumers to distinguish between products of different businesses.
  • Limitations:
    • If *costs of production for a business are higher than those of competitors (maybe due to higher quality), then a competitive price could lead to losses being made.
    • A higher quality product might need to be sold at a price above competitiors’ prices to give it a higher quality image.
    • Detailed research would be needed into what prices competitors are charging, and this research costs time and money.

Penetration pricing

• DEFINITION: When the price is set lower than the competitors’ prices in order to be able to enter a new market.
  • Benefits:
    • Used for newly launched products to create an impact with customers.
    • Should ensure that sales are made and the new product enters the market successfully.
    • Market share should build up quickly.
  • Limitations:
    • Product is sold at a low price and therefore profit per unit may be low.
    • Customers might adapt to low prices and can reject the product if the business starts to raise the price after the product’s early success.
    • Might not be appropriate for a branded product known for quality.

Price skimming

• DEFINITION: Where a high price is set for a new product on the market. This is mainly used for a product that is a new invention, or a new development of an old product, ∴ it can be sold on the market at a high price and people are willing to purchase this at a high price because of the novelty factor.
  • Benefits:
    • Can help establish the product as being of good quality.
    • High research and development costs can be rapidly regained from the profit made on the product at the high price.
    • If the product is unique, a high price will lead to profits being made before competitors launch similar products ∴ the price has to be reduced.
  • Limitations:
    • High price can discourage some potential customers from buying it.
    • High price and high profitability may encourage more competitors to enter the market.

Promotional pricing:

• DEFINITION: When a product is sold at a very low price for a short period of time. Businesses might be using this to increase short-term sales.
  • Benefits:
    • Useful for getting rid of unwanted inventory that will not sell.
    • Can help renew interest in a product if sales are failing (e.g. during an economic recession).
  • Limitations:
    • Revenue will be lower because price of each item is reduced.
    • Might lead to a price competition with competitors, so the business might have to reduce prices again.

Price elasticity of demand

• Price elastic demand is where consumers are very sensitive to changes in price. For example, if the price of a chocolate bar rose by 5%, they might find alternative chocolate bars and sales might fall by 15%. The percentage change in quantity demanded is greater than the percentage change in price.
• Price inelastic demand is where consumers are not sensitive to changes in price. For example, if electricity prices rose by 15%, it would not cause much of a fall in sales (perhaps 5%) as most consumers will carry on buying the product at the higher price. The percentage change in quantity demanded is less than the percentage change in price.

Impact of psychology on price decisions

• A very high price for a high quality product may mean that high-income customers wish to purchase it as a status symbol.
• If a price is set just below a whole number (e.g. 99 cents instead of 1 dollar) creates the impression of a very cheap product.
• Supermarkets may charge low prices for products purchased on a regular basis, which will give customers the impression of being given good value for money.
• Repeat sales are often made when the price reinforces consumers’ perceptions of the product. This may be its brand image when the price is set high.

Using different pricing methods for the same product

• Many businesses sell their products using different pricing methods for different segments of the market or at different times. This is often called dynamic pricing.
• Dynamic pricing is when businesses change product prices, usually when selling online, depending on the level of demand.