Chapter 27 Blue book -Pricing Theories

What determines a price? The cost of production The market conditions The competitor’s pricing Marketing objectives Price elasticity of demand Whether it’s a a new or existing product

Types of pricing strategy Explanation 1.Cost plus pricing Adding a percentage mark up to the cost 2.Marginal cost price Basing the price on the extra cost of making one additional unit of output 3.Contribution cost pricing Setting prices based on the variable costs of production in order to make a contribution to fixed costs 4.Full cost/absorption Setting a price by calculating the unit cost and then adding fixed mark up 5.Competition pricing Bases prices on competitors prices 6.Predatory/destroyer pricing Undercuts competitors prices to force them out of the market 7.Going rate Based on market conditions and competitors prices

Market based pricing Pricing strategies can be categorised into two broad categories Penetration Pricing –setting prices low in order to achieve high sales –penetrate the market Market Skimming –setting prices high for a new product to show it’s unique and differentiated, worth paying for.

Other types of pricing strategies Price discrimination –different prices for the same product Loss Leader –product sold at a very low price to encourage consumers to buy other products Psychological pricing –setting prices that take into account customer’s perception of value of the product Promotional pricing –special low prices to gain market share –buy one get one free

Prices are influence by Economics Prices are determined by supply and demand -If supply increases, then the price is likely to fall. If there are a lot of houses for sale, then the price will drop. -If demand increases, then the price is likely to rise. If there are a lot of people wanting to buy houses compared to supply, the prices will rise.

PED Price elasticity of demand refers to the measure of responsiveness of demand following a change in price. The formula for PED is percentage change in quality demanded/percentage change in price If the price of a textbook increases by 10% and demand therefore falls by 30%, then the PED is 30/10 = 3 –Demand is price elastic when the value is greater than 1

Income elasticity Measures the responsiveness of demand for a product following a change in consumer’s incomes. Products such as DVDs and airline travel have positive income elasticity, as income rises, demand for these products increase. Necessity goods have low income elasticity, the demand for petrol is generally consistent regardless of incomes Luxury goods have high income elasticity Income elasticity is measure by percentage change in demand divided by the percentage change in income.

Cross Elasticity of Demand (XED) Cross elasticity –measures the responsiveness of demand for a product following the change in the price of another product Cross elasticity = percentage change in demand for product X/ percentage change in demand for product Y

Advertising Elasticity -Measures the responsiveness of demand for a product following a change in the advertising spent on it Advertising elasticity = percentage change in demand for product/percentage change in advertising spent on product

Activities Do Activity 27.1 page 285 Do Acitivity 27.2 page 286 Work on assessment task –Identify pricing strategies used by your brand