1. 3.4 – Using the marketing mix: Price

2. Learning objectives:
​To understand the different pricing decisions businesses face (AO1)
To analyse the different pricing decisions businesses face (AO3)
To apply these decisions to a business example (AO2)

3. Making marketing decisions: Using the marketing mix: Product
Price
Promotion
Place
People
Process
Physical environment

4. Starter discussion: What factors may determine how much a firm charges for its products?

5. Factors impacting on price charged
There are several factors a business needs to consider in setting the price:
Competitors’ products and prices
Costs of production, promotion, etc.
Market conditions, for example, demand levels, accepted prices, market share, etc.
The state of the economy and its impact on consumers’ disposable income
The bargaining power of customers in the target market – Do they sell to consumers or businesses?
Location of the business
Brand image, reputation and customer loyalty
Product quality and packaging
Price elasticity of demand – Is the product elastic or inelastic?

6. Pricing strategies Show video – Why are people queuing for Apple?
There are two pricing strategies that can be used by firms when they are first launched into the market:
Penetration pricing: Low prices are charged to help attract customers; to gain a foothold in the market and establish market share. It is commonly used with new food products.
Price skimming: High price are charged to gain a high profit margin from early adopters. It is commonly used when the business has already established a strong brand image and has a loyal customer base, for example, Apple.
Early adopters are people who are willing to pay high prices to purchase products when they are first launched. Very common in technology markets such as games consoles and phones.

7. Pricing strategies Price Demand/Time Price skimming
Penetration pricing
Demand/Time

8. Other pricing strategies and methods
Price leadership and price taking – Large market leading firms, known as price leaders, are able to set the price in a market as they have the market power. This may be because they have a strong USP, brand image or customer loyalty. Smaller rivals, known as price takers, which do not have as much market power take the accepted price and follow.
Predator (or destroyer) pricing – Firm sets very low prices in order to drive other firms out of the market.
Premium pricing – Charging high prices for high quality goods, for example, luxury cars, holidays, clothes or jewellery.
Seasonal pricing – Different prices are charged depending on the level of demand. In peak seasons higher prices can be charged and vice versa.
Question – Can you give examples of businesses that use these?

9. Loss leaders – A short-term tactic where firms set lower prices than usual to attract customers who they hope will buy other full-priced products. Very common in supermarkets, mobile phone contracts where the handset is free and mobile games where the game is free but you then have in-app purchases.
Psychological pricing – Prices are set to appear lower to the consumer, for example, products sold for £9.99 or not including add-on fees such as only advertising the entrance fee for paintballing but not the cost of paintballs needed to play.
Price discrimination – Higher price are charged to some customers for the same product/service, for example, taxis, train fares.
Cost-plus pricing – The average cost of producing a product plus a sum to ensure profit is made.
Mark up – The percentage added to a product to ensure a profit is made.
Question – Can you give examples of businesses that use these?

10. Example and exam-style questions
When Sony first released the PlayStation 3 in 2006 they sold it at a loss. It cost about $805 to build and initially sold for $599. Over time costs and prices came down and by 2009 the PS3 was selling for $299 at a cost of $336 to build. The PS4 costs approximately $381 and when launched sold for a $399 retail price, only an $18 difference. These small profit margins are rare in consumer electronics. For example, Apple’s iPad Air sells for a minimum of $499 at retail, yet costs up to $274 to build.
Discuss whether Sony was right to use price skimming on the launch of the PS4? Justify your view. (16 marks)

11. Summary The price set by a firm is decided by a wide range of factors.
It is also one of the most important parts of the marketing mix to get right as it is a key part of the consumer buying decision.
Many firms do not like to compete on price as it may trigger a price war.
If firms constantly undercut each other to attract customers the only result is profit margins falling and the only stakeholder that benefits is the consumer.