3.4 – Using the marketing mix: Price AQA A-level Business © Hodder & Stoughton Limited 2015

AQA A-level Business © Hodder & Stoughton Limited 2015 Learning outcomes Making marketing decisions: Using the marketing mix What you need to know: The elements of the marketing mix (7Ps) The influences on and effects of the changes in the elements of the marketing mix Pricing decisions AQA A-level Business © Hodder & Stoughton Limited 2015

Making marketing decisions: Using the marketing mix: Product Price Promotion Place People Process Physical environment AQA A-level Business © Hodder & Stoughton Limited 2015

AQA A-level Business © Hodder & Stoughton Limited 2015 Starter discussion: What factors may determine how much a firm charges for its products? AQA A-level Business © Hodder & Stoughton Limited 2015

Factors impacting on price charged (explain in 1 sentence why each of these impact price) There are several factors a business needs to consider in setting the price: Competitors’ products and prices Costs of production, promotion, etc. Market conditions, for example, demand levels, accepted prices, market share, etc. The state of the economy and its impact on consumers’ disposable income The bargaining power of customers in the target market – Do they sell to consumers or businesses? Location of the business Brand image, reputation and customer loyalty Product quality and packaging Price elasticity of demand – Is the product elastic or inelastic?

Pricing strategies There are two pricing strategies that can be used by firms when they are first launched into the market: Penetration pricing: Low prices are charged to help attract customers; to gain a foothold in the market and establish market share. It is commonly used with new food products. Price skimming: High price are charged to gain a high profit margin from early adopters. It is commonly used when the business has already established a strong brand image and has a loyal customer base, for example, Apple. Early adopters are people who are willing to pay high prices to purchase products when they are first launched. Very common in technology markets such as games consoles and phones.

AQA A-level Business © Hodder & Stoughton Limited 2015 Pricing strategies Price Price skimming Penetration pricing Demand/Time AQA A-level Business © Hodder & Stoughton Limited 2015

Other pricing strategies and methods Price leadership and price taking – Large market leading firms, known as price leaders, are able to set the price in a market as they have the market power. This may be because they have a strong USP, brand image or customer loyalty. Smaller rivals, known as price takers, which do not have as much market power take the accepted price and follow. Predator (or destroyer) pricing – Firm sets very low prices in order to drive other firms out of the market. Premium pricing – Charging high prices for high quality goods, for example, luxury cars, holidays, clothes or jewellery. Seasonal pricing – Different prices are charged depending on the level of demand. In peak seasons higher prices can be charged and vice versa.

Other pricing strategies and methods Loss leaders – A short-term tactic where firms set lower prices than usual to attract customers who they hope will buy other full-priced products. Very common in supermarkets, mobile phone contracts where the handset is free and mobile games where the game is free but you then have in-app purchases. Psychological pricing – Prices are set to appear lower to the consumer, for example, products sold for £9.99 or not including add-on fees such as only advertising the entrance fee for paintballing but not the cost of paintballs needed to play. Price discrimination – Higher price are charged to some customers for the same product/service, for example, taxis, train fares. Cost-plus pricing – The average cost of producing a product plus a sum to ensure profit is made. Mark up – The percentage added to a product to ensure a profit is made.

Price elasticity of demand (PED) This measures the responsiveness (or sensitivity) of demand to a change in price PED = percentage change in quantity demanded percentage change in price Elastic goods = an answer greater than 1, where demand will change with a price change. The higher the number the more elastic the product is and more demand will change as price changes. Inelastic goods = Less than 1, where demand is relatively unresponsive to a change in price. The smaller the decimal the more inelastic it is. If prices increase there will be little to no impact on demand. Unitary elasticity = an elasticity of 1, any price change is cancelled out by the demand change. [Used in PP3.2b] Elasticity will always be a negative figure as when price goes up demand falls and when prices fall demand rises. The relationship between these variables is opposite and therefore negative. AQA A-level Business © Hodder & Stoughton Limited 2015

AQA A-level Business © Hodder & Stoughton Limited 2015 Discussion: What factors may determine how elastic or inelastic a product is? AQA A-level Business © Hodder & Stoughton Limited 2015

Example and exam-style questions When Sony first released the PlayStation 3 in 2006 they sold it at a loss. It cost about $805 to build and initially sold for $599. Over time costs and prices came down and by 2009 the PS3 was selling for $299 at a cost of $336 to build. The PS4 costs approximately $381 and when launched sold for a $399 retail price, only an $18 difference. These small profit margins are rare in consumer electronics. For example, Apple’s iPad Air sells for a minimum of $499 at retail, yet costs up to $274 to build. AQA A-level Business © Hodder & Stoughton Limited 2015

Example and exam-style questions Analyse why you believe Sony decided to sell its PS4 console using a loss leader strategy on its launch? (6 marks) Explain the factors that might influence the price at which Sony sells its games consoles. (6 marks) Discuss whether Sony was right to use price skimming on the launch of the PS4? Justify your view. (16 marks) Exam tip: Use a supported judgement in the final paragraph to answer the actual question asked. Support your judgement using key points from the case. You may also wish to discuss the judgement in the short and long term to build a more in-depth final evaluation AQA A-level Business © Hodder & Stoughton Limited 2015

AQA A-level Business © Hodder & Stoughton Limited 2015 Summary The price set by a firm is decided by a wide range of factors. It is also one of the most important parts of the marketing mix to get right as it is a key part of the consumer buying decision. Many firms do not like to compete on price as it may trigger a price war. If firms constantly undercut each other to attract customers the only result is profit margins falling and the only stakeholder that benefits is the consumer. AQA A-level Business © Hodder & Stoughton Limited 2015