The Price is Right!

Determining Price Price of a good or service is determined by many factors. Businesses use either individual factors or a combination of these factors to make their pricing decisions.

Factors in determining price Consumer demand – what are customers willing to pay for the product? Competition – what is the competition charging? Customer perception – what value does the customer put on this product? Uniqueness of product – what is different about this product that will attract customers?

Factors in determining price To achieve profit – how much profit do we want to make? To cover costs – needs to cover costs of production, marketing, distribution, etc – how much does it cost to make our product? Stage of the product life cycle – where on the product life cycle is our product?

Pricing Strategies Cost plus pricing Psychological pricing Various pricing strategies are used to determine the most suitable price. The most commonly used ones are: Cost plus pricing Psychological pricing Differentiated pricing Penetration pricing Skimming Pricing Contribution Pricing Premium /Luxury pricing Competitive pricing Promotional pricing Target Pricing Predatory Pricing

Cost Plus Pricing Student Activity: Cost Plus pricing first calculates the cost of the product, then includes an additional amount for profit, e.g. cost to make a hamburger Student Activity: In pairs or small groups work out the costs to produce a hamburger. Add a realistic percentage for profit and come up with a suitable price

Cost Plus Pricing Example solution for student activity : HAMBURGER Ingredients =$1 Labour =.62c R & D =.70c Other Overheads =.68c Total Cost =$3.00 + 50% profit =$1.50 Price =$4.50

Cost Plus Pricing Advantage: Easy to calculate Disadvantage: Could impact sales if desired profit too high

Premium / (Prestige or Luxury) Pricing Premium pricing is about using a high price where there is a uniqueness about the product – e.g. a luxury good or service, e.g. Porsche, Corporate Cab, Day Spa, Champagne. Often a substantial competitive advantage exists. Premium pricing may also be the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price – e.g. bottled mineral water or labelled products. If the price is high this must be a desirable product……

Premium / (Prestige or Luxury) Pricing Class Discussion Are label brands and generic brands made by the same manufacturer with same or similar resources?

Premium / (Prestige or Luxury) Pricing Advantage: Attracts customers to purchase high end luxury products regardless of price Disadvantage: If price drops too low customers may think the quality is compromised

Psychological Pricing This has two aspects: Is when attention is paid to price of a product in regards to what consumers perceive of the product’s price. A business may charge just below the products actual price so customers then perceive this to be a cheaper product e.g. 99 cents for a product rather than $1.01cent (with rounding up and down either way product still costs $1!)

Psychological Pricing CLASS ACTIVITY 1. In pairs or small groups list products you have recently purchased that use Psychological Pricing 2. As a consumer do you think this is a fair way to price goods and services? Discuss

Psychological Pricing Advantage: Is that the business might achieve more sales if customer perception is that the product is of high quality or good value for money Disadvantage: Could have opposite effect if customers perceive product to be cheap and lacking quality

Competitive Pricing Competitive pricing is when the product is priced in line with or just below competitors prices to try to capture more of the market, e.g. a 1.5 litre well known soft drink brand might sell for $1.75 whereas the cheaper supermarket homebrand equivalent could sell for $1.60

Competitive Pricing Advantage: Sales are likely to be high as the price is at a realistic level and the product is not under or over priced Disadvantage: In order to decide what this price should be, the competitors’ prices would have to be researched and this costs time and money

Differentiated Pricing Differentiated pricing is aimed at different segments of the target market e.g. Prices of haircuts woman vs. men‘s regardless of length, type, etc Student vs. Adult prices at the cinema Different fares on an airplane (due to purchase dates) Prices of utilities (power, gas) – peak and off peak times

Differentiated Pricing Advantages: Customers have some choice about what they will have to pay. Businesses are able to maximise profit from the different market segments. Disadvantage: Customers may feel they are getting a bad deal as there does not appear to be equitable

Promotional Pricing Promotional pricing is when a product is sold at a very low price for a short period of time, e.g. sales, introduction of new products. Loss Leader = when a product sold is at a very low price (below cost) to entice customers into the store in the hope they will spend more.

When do most promotional sales occur? Promotional Pricing CLASS DISCUSSION When do most promotional sales occur?

Promotional Pricing Advantages: It is useful for getting rid of unwanted stock It can help to renew interest in a business if sales are falling Disadvantage: The sales revenue will be lower because the price of each item will be low

Penetration Pricing Is when the price is set lower than the competitors prices in order to be able to enter a new market

Penetration Pricing Advantage: Sales are made when the new product enters the market. Disadvantage: the product is sold at a low price and therefore the sales revenue may be low.

Target Pricing Target pricing is when a business adds up all the costs of producing the product, adds a profit, divides the return by the amount of unit produced and then sells the product for that particular price, e.g. Total production costs for 5000 units $250,000 Required profit (25%) $62,500 Total return $312,500 Price per unit 312,000/5,000 $62.50c

Target Pricing Advantage: Disadvantage: Allows business to calculate profit before product is sold Disadvantage: Businesses may compromise on quality to reduce costs to achieve set profit

Price Skimming Price skimming is when a new or innovative product enters the market at a high price. e.g. X-Box, PS3, DVD and Blu Ray

Price Skimming Advantage: Skimming can help to establish the product of being of good quality Disadvantage: It may put off some potential customers because of the high price

Predatory Pricing Predatory pricing is when a business sells a product or service at a very low price, with the deliberate intention of pushing competitors out of the market or to stop other competitors entering the market

Predatory Pricing STUDENT ACTIVITY Using the coloured pens and paper work in pairs or small groups to come up with the advantages and disadvantages of a business implementing Predatory Pricing. You will be required to present this to the class

Predatory Pricing Advantage: If the business is strong enough to sustain the low profits then this may be a beneficial strategy Disadvantages: Could be seen as anti-competitive and face legal issues Sales revenue could be very low and the business might not be able to recover

Contribution Pricing Contribution costing is when a business takes account of the variable cost of producing the product and adds an amount as a contribution towards the fixed cost. This strategy is often used when a product is not generating the same revenue all the time, e.g. public transport will run regardless of customer usage

Contribution Pricing Advantage: Avoids having to guess what fixed costs and overheads belong to each department, etc Disadvantages: There is a risk that the price set will not recover total fixed costs in the long term It may be difficult to raise prices if the contribution per unit is set too low

Complete the terms and definition activity