Price is the same thing as cost Misconception: Price is the same thing as cost

What is a pricing strategy?

What are the influences on pricing decisions? Discussion What are the influences on pricing decisions? Stage in the product life cycle USP Price elasticity of demand Brand Competition Costs of production

the marketing mix - Price Pricing strategies include: Cost plus Price skimming Penetration Predatory Competitive Psychological

Cost plus Cost plus is when a percentage mark up is added to the cost of producing a good or service to calculate the selling price Variable cost per unit + a proportion of total cost (total cost per unit) + a percentage mark-up The percentage mark up is how much the business wants to achieve as profit Example: VC per unit = £5.00 TC per unit = £10.00 Mark–up = 25% Selling price = (£5.00 + £10.00) x 1.25 = £18.75 Why might this method appear simple but be more complex for a business with a range of products?

Price skimming Price skimming involves setting a high initial price for a new product in order to recoup costs When a firm releases a new product it often charges a high price targeting a segment of the market known as ‘early adopters’ These are customers who must have the product as soon as it is launched and are prepared to pay high prices to get it Firms often base their initial promotional campaign around this idea, trying to create a ‘must have’ mentality amongst their target market Once this market has been ‘skimmed off’ the company will lower price

penetration pricing Price penetration involves setting a low initial price for a new product in order to get a foothold in the market and gain market share May be a suitable pricing strategy for a product in a mass market A firm will release a new product at a low price with the aim of enticing people to buy The aim is to gain an early customer base Once the product has been launched and built up a customer base the firm may raise the price Likely to be used with a price elastic product

Predatory pricing Is Microsoft offering free software as part of their operating system predatory pricing? Predatory pricing is when prices are set low for a short period of time to force competitors out of the market Prices are then put back to where they were previously or even higher This strategy is used by dominant businesses, who can afford to make a loss in the short run, to force new entrants out of the market

Competitive pricing Prices are based on the prices charged by competitors, maybe the same or slightly lower, firms will try to compete on other aspects of the marketing mix Price leaders Price takers Firms that dominate a market with an existing product set the price and other firms in the market follow suit. It is illegal for firms to get together to set prices in order to increase the total value of the market. Smaller firms will sometimes look to the largest firm in the market to set the price and then follow this price lead. If the smaller firm were to lower their price below that set by the price leader it might start a price war that it has no hope of winning. Smaller firms in the market who set their prices based on the market price. This might be the price set by the market leader or it might be in a very competitive market where firms sell similar products and customers find it hard to differentiate the product. If the small firm were to lower price in order to increase market share all other firms would have to follow suit and the customer, rather than the firm, would benefit from lower prices. A price leader is likely to respond to a smaller firm cutting prices by cutting prices themselves. The small firm would be unlikely to do this because it would retain the same market share but at a lower selling price.

Psychological pricing Psychological pricing occurs when a firm sets a price for the product in order to entice the customer into making a purchase by making it sound cheaper than it actually is A common example of psychological pricing is when a firm charges £9.99 rather than £10.00

In pairs Identify 3 different products that use each of the following pricing decisions: Price skimming Price penetration Psychological pricing In each example explain why you think the firm made this pricing decision? http://www.bbc.co.uk/news/business-33155628 The unstoppable rise of the discounters To what extent is price the only important aspect of the marketing mix for discount retailers?

Influences on the pricing decision… Costs of production Competition Brand Influences on the pricing decision… Stage in the product life cycle Price elasticity of demand USP

Changes in pricing to reflect social trends Online sales have led to the frequent use of dynamic pricing Prices change frequently and quickly in response to changes in demand At times of peak demand prices will go up and vice versa Often used by businesses with set capacity e.g. an airline so as the plane reaches full capacity prices will start to rise Dynamic pricing is made possible by technology that tracks demand and levels of interest Price comparison websites Easier for customers to compare prices thereby forcing businesses to be more competitive due to the ease with which customers can access comparative information Popular sites include GoCompare, Trivago and Sky Scanner

Influences on the pricing decision… Costs of Production Cost-plus pricing Mark-up Depends on: Level of competition Price customers are prepared to pay The firms objectives

PRICE ELASTICITY OF DEMAND How do markets work? Elasticity Measures how a change in one variable affects the demand for a product PRICE ELASTICITY OF DEMAND

Price elasticity of demand The responsiveness of demand to a change in price. Calculated by: % change in quantity demanded % change in price

So, for every 1% change in price, demand changes by only 0.5% Your task: Apple cut the price of its I-pods by 10% but demand only increased by 5%, was this a good decision? Demand was obviously not very responsive Answer: 5% 10% = -0.5 So, for every 1% change in price, demand changes by only 0.5%

Price Elasticity of Demand % change in quantity demanded What's the significance of the change? Elastic % change in price = change in Q demanded Ignore the minus! Inelastic % change in price = smaller change in the Q demanded Less than 1 (again, ignore the minus) Unit elasticity Both the %changes are the same No change PED = % change in price

Key terms: Price inelastic demand: The demand for a product changes relatively less than the change in price Price elastic demand: The demand for a product changes relatively more than the change in price

How can a business use this? It shows whether a change in price is likely to actually increase sales and have a positive or negative impact on sales revenue

Interpreting price elasticity: Product X = (-) 4.0 Product Y = (-) 0.3 What conclusions can we draw for product X and Y? Product X A change in price leads to a proportionally larger change in quantity demanded. Not necessity Has lots of substitutes Possibly a cheap, low quality substitute Product Y Product is a necessity or has few close substitutes May be habit forming Appeals to consumers who can afford higher prices

A03: Assess the factors that influences PED? Necessity Habit Availability of substitutes Brand loyalty Proportion of income spent on a product Income of consumer Stretch & challenge corner: Significance of PED… so what? Price discrimination… what does it mean? What are the difficulties in calculating/using PED?

Elastic

-2 = %∆Q/ -10% -2 x -10 = 20% £45 600 R = PxQ 600 x £45 = £27,000 Previously £50 x 500 = £25,000 Now £45 x 600 = £27,000

-2 = %∆Q/ +5% -2 x 5% = -10% Change in Quantity = -10% New Quantity = 450 Revenue = 450 x 52.50 = £23,625