Chapter 32: Using the Marketing Mix Pricing

Pricing Strategies Price Skimming – high price is set to yield a high profit margin, usually during the introduction of a product Penetration Pricing – low prices are set to break into a market or to achieve rapid growth in market share Price Leadership and Price Taking – in price leadership a large company (the price leader) sets a market price that smaller firms (price takers) tend to follow) Predator (or destroyer) Pricing – when a firm sets very low prices in order to drive other firms out of the market

Pricing Tactics A pricing approach or technique used in the short term to achieve specific objectives Loss Leaders – setting low prices for certain products in order to encourage consumers to buy other, fully priced products Psychological Pricing – intended to give the impression of value (ie: £9.99 instead of £10)

Influences on the pricing decision Costs of Production (in cost-plus pricing, a mark-up percentage is added to the average cost of producing a product) Price Elasticity of Demand – the responsiveness of a change in the quantity demanded to a change in price Price elasticity = % change in quantity demanded of Demand % change in price Elastic Demand – greater than 1 Inelastic Demand – less than 1 IGNORE THE MINUS SIGN

Factors influencing price elasticity of demand Necessity Habit Availability of Substitutes Brand Loyalty Proportion of Income spent on a product Income of consumers

Difficulties in calculating and using price elasticity of demand Price elasticity of demand calculations assume that ‘other things remain equal’ while price changes... In practice, this does not happen There may have been significant changes in the market, affecting the level of demand independently of price Competitors’ reactions Consumers’ reactions Market research