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

2. What is a pricing strategy?

3. 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

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

5. 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 = (£ £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?

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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?
The unstoppable rise of the discounters
To what extent is price the only important aspect of the marketing mix for discount retailers?

12. 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

13. 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

14. 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

15. 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

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

17. 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%

18. 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

19. 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

20. 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

21. 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

22. 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?

23. Elastic

24. -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

25. -2 = %∆Q/ +5%
-2 x 5% = -10%
Change in Quantity = -10%
New Quantity = 450
Revenue = 450 x = £23,625