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--WHAT IS THE ROLE OF PRICE WITHIN THE MIX?--
--WHAT IS THE ROLE OF PRICE WITHIN THE MIX?--
When deciding a price for an existing product or a new product, the business must be very careful to choose a price which will fit in with the rest of the marketing mix for the product.
When deciding a price for an existing product or a new product, the business must be very careful to choose a price which will fit in with the rest of the marketing mix for the product.
-For example, if a new product is of high quality, aimed at consumers who have a lot of money, is wrapped in luxurious packaging, but has a low price, consumers will not think it is a good quality product and will not buy it.
-For example, if a new product is of high quality, aimed at consumers who have a lot of money, is wrapped in luxurious packaging, but has a low price, consumers will not think it is a good quality product and will not buy it.
-Some products are sold in very competitive markets and prices will have to be set near to their competitors' prices.
-Some products are sold in very competitive markets and prices will have to be set near to their competitors' prices.
-Other products are the only ones available in their market and so consumers may be willing to pay a high price to have one of these products.
-Other products are the only ones available in their market and so consumers may be willing to pay a high price to have one of these products.
--PRICING STRATEGIES--
--COST-PLUS PRICING--
--COST-PLUS PRICING--
▶️COST-PLUS PRICING involves calculating the total cost of producing the output, and finally adding a percentage mark-up for profit. e.g. +20%
▶️COST-PLUS PRICING involves calculating the total cost of producing the output, and finally adding a percentage mark-up for profit. e.g. +20%
(+) The method is easy to apply.
(+) The method is easy to apply.
(+) It guarantees a profit if final costs are difficult to measure e.g. often constructions go over budget.
(+) suitable if you want a certain profit and actual costs are unpredictable for example, you give a quoted price for a guarden but later discover its a bigger job so you aise the price maintaining you sat 20% margin.
(-) You could lose sales if the selling price is a lot higher than your competitor's price.
(-) You could lose sales if the selling price is a lot higher than your competitor's price.
When Competition is Weak or Irrelevant
If a firm faces little competition (e.g. specialized manufacturing or public sector contracts), there's less pressure to price competitively.
When Products Are Made to Order
In industries like construction, consulting, or defense, every job is different. Cost-plus lets firms price flexibly based on each project's true cost.
To Manage Cost Uncertainty
If input costs change frequently (e.g. raw materials or fuel), cost-plus helps protect profit margins by passing those changes to the customer.
Transparency for Contracts
Governments and clients may require cost-plus pricing in contracts so they can see exactly what they're paying for (e.g. cost breakdown + agreed profit).
--PENETRATION PRICING--
--PENETRATION PRICING--
▶️PENETRATION PRICING would possibly be used when trying to enter a new market. The price would be set lower than the competitors' prices.
▶️PENETRATION PRICING would possibly be used when trying to enter a new market. The price would be set lower than the competitors' prices.
(+) It ensures that sales are made and the new product enters the market.
(+) It ensures that sales are made and the new product enters the market.
(-) The product is sold at a low price and therefore the profit per unit sold may be low.
(-) The product is sold at a low price and therefore the profit per unit sold may be low.
For example, a company launches a new chocolate bar at a price several pence below the prices of sim1ilar chocolate bars that are already on the market. If this is successful, consumers will buy the new bar and will become regular customers.
For example, a company launches a new chocolate bar at a price several pence below the prices of sim1ilar chocolate bars that are already on the market. If this is successful, consumers will buy the new bar and will become regular customers.
--COMPETITIVE PRICING--
--COMPETITIVE PRICING--
▶️COMPETITIVE PRICING involves putting prices in line with your competitors' prices or just below their prices.
▶️COMPETITIVE PRICING involves putting prices in line with your competitors' prices or just below their prices.
(+) Sales are likely to be high as your price is at a realistic level and the product is not under- or over-priced.
(+) Sales are likely to be high as your price is at a realistic level and the product is not under- or over-priced.
(-) In order to decide what this price should be, you would have to research what price your competitors are charging, and this costs time and money.
(-) In order to decide what this price should be, you would have to research what price your competitors are charging, and this costs time and money.
For example, a company wants to sell a brand of soap powder. It needs to sell it at a similar price to all the other brands available or consumers will buy their competitors' brands.
For example, a company wants to sell a brand of soap powder. It needs to sell it at a similar price to all the other brands available or consumers will buy their competitors' brands.
--PRICE SKIMMING--
--PRICE SKIMMING--
PRICE SKIMMING is often used when it is a new invention, and therefore it can be sold on the market at a HIGH PRICE and people may well pay for it as they will have no other similar product to measure its worth against. As a new product, it may well have incurred large R& D costs which need to be recoupled via a higher price.
PRICE SKIMMING is often used when it is a new invention, and therefore it can be sold on the market at a HIGH PRICE and people may well pay for it as they will have no other similar product to measure its worth against. As a new product, it may well have incurred large R& D costs which need to be recoupled via a higher price.
(+) As we know a high price is often a signal to customers that the good s of high quality.
(+) As we know a high price is often a signal to customers that the good s of high quality.
(-) However, a high price for a novelty may put off customers who will wait for rival companies to produce similar products and lower the price.
(-) However, a high price for a novelty may put off customers who will wait for rival companies to produce similar products and lower the price.
For example, a new computer games console with better specs is sold at a very high price initially, and depending on its appeal fans will pay this price, and the firm can quickly earn the R & D money back.
For example, a new computer games console with better specs is sold at a very high price initially, and depending on its appeal fans will pay this price, and the firm can quickly earn the R & D money back.
--PROMOTIONAL PRICING--
--PROMOTIONAL PRICING--
PROMOTIONAL PRICING is, as the name suggests, a price level that is intended to be used during a 'SALES' period and is usually 'TEMPORARY'.
PROMOTIONAL PRICING is, as the name suggests, a price level that is intended to be used during a 'SALES' period and is usually 'TEMPORARY'.
(+) Useful for getting rid of stock that won't sell. (+) Helps to renew interest in a business that is failing.
(+) Useful for getting rid of stock that won't sell. (+) Helps to renew interest in a business that is failing.
(-) As the price is low, the revenue will also likely be low.
(-) As the price is low, the revenue will also likely be low.
For example, at the end of the winter season, H & M, try to sell off their winter products by having an 'END-OF-SEASON-SALE', offering DISCOUNTS and promotions such as 'BUY-ONE-GET-ONE FREE'.
For example, at the end of the winter season, H & M, try to sell off their winter products by having an 'END-OF-SEASON-SALE', offering DISCOUNTS and promotions such as 'BUY-ONE-GET-ONE FREE'.
--PSYCHOLOGICAL PRICING--
--PSYCHOLOGICAL PRICING--
PSYCHOLOGICAL PRICING is concerned with how the price impacts the customers' perception of the product, for example:
PSYCHOLOGICAL PRICING is concerned with how the price impacts the customers' perception of the product, for example:
High price conveys high quality and Low price conveys good value for money...
$0.99 vs $1.00...
(+) Ensures sales and promotes brand image in the case of luxury goods.
(+) Ensures sales and promotes brand image in the case of luxury goods.
(+) In the case of the $0.99 strategy, the loss in revenue is tiny compared to the potential gains over rivals.
(-) All pricing can be copied by rivals
--DYNAMIC PRICING--
--DYNAMIC PRICING--
'DYNAMIC PRICING' is also called 'PRICE DISCRIMINATION' and occurs when a product is offered at different prices to two different sets of consumers. For example, plane and cinema tickets are sold at different prices to adults and children. These prices also change depending on the level of demand, for example, plane tickets rise during the summer holidays.
'DYNAMIC PRICING' is also called 'PRICE DISCRIMINATION' and occurs when a product is offered at different prices to two different sets of consumers. For example, plane and cinema tickets are sold at different prices to adults and children. These prices also change depending on the level of demand, for example, plane tickets rise during the summer holidays.
(+) Increased sales revenue and profits.
(+) Increased sales revenue and profits.
(+) Ensure full capacity.
(-) High cost of changing prices.
(-) High cost of changing prices.
(-) High cost for customers in terms of time searching for the best price.
--HOW TO WRITE A 12-MARK ANSWER--
--HOW TO WRITE A 12-MARK ANSWER--
+ 2 ADDITIONAL MARKS FOR APPLICATION
--TASK TIME 1.--
--TASK TIME 1.--
(VC) Consider the following three pricing methods [Penetration pricing, Price skimming & Cost-plus pricing] VC could use for its new products. Which method should Peter choose? Justify your answer.
--TASK TIME 2.--
--TASK TIME 2.--
(GS) Consider the following three pricing strategies GS could use when selling plants and trees to customers [Cost-plus pricing, Competitive pricing & Promotional pricing]. Recommend which is the best pricing strategy to choose to increase GS’s profit. Justify (12).
--PRICE ELASTICITY OF DEMAND--
--DEFINITION--
--DEFINITION--
Before we define this we need to note that PED is BASED on the LAW OF DEMAND which states:
"As the PRICE (P) of a product RISES, the QUANTITY DEMANDED (Qd) FALLS, and vice versa"
Given this INVERSE relationship between price and quantity demanded we get PRICE ELASTICITY OF DEMAND (PED) which is a MEASURE OF THE RESPONSIVENES of the quantity of a good demanded to changes in its price. For example...
"If the school puts its prices up by 10% how much will the quantity demanded of school places fall? 5%, 10%, 20%,....?", "In other words how RESPONSIVE is the change in Qd relative to the change in price?"
--TASK--
--TASK--
Copy the above question into your book and explain your answer. Name at least TWO FACTORS that impacts your school's responsiveness.
--FORMULA--
--FORMULA--
--VALUES & DIAGRAMS--
--VALUES & DIAGRAMS--
--DETERMINANTS--
--DETERMINANTS--
--INELASTIC--
--INELASTIC--
The FEWER SUBSTITUTES a good (or service) has, the MORE INELASTIC is its demand.
If the price of a good with few substitutes increases, consumers can't switch to other substitute products, therefore resulting in a relatively small drop in quantity demanded. e.g. petrol
Also if the good is ADDICTIVE, such as tobacco or alcohol, then there are few substitutes, and its demand as a whole will be inelastic.
--ELASTIC--
--ELASTIC--
The MORE SUBSTITUTES a good (or service) has, the MORE ELASTIC is its demand.
If the price of a good with many substitutes increases, consumers can switch to other substitute products, therefore resulting in a relatively large drop in quantity demanded. E.g. Coke Cola & Pepsi
--IMPACT ON TOTAL REVENUE (TR)--
--IMPACT ON TOTAL REVENUE (TR)--
--TR ALONG A LINEAR DEMAND CURVE--
As you can see below as price changes the TR changes in this case going from a low of $10 to a high of $30.
If we plot this TR we can see how it rises and falls as price is raised and lowered, which implies there is a price at which it 'PEAKS' or 'MAXIMISES'
WE CAN SEE THAT AS THE PRICE IS LOWERED THE TOTAL REVENUE INITIALLY STARTS TO RISE, THEN PEAKS BEFORE FALLING, AND VICE-VERSA.
WE CAN SEE THAT THERE WILL ALWAYS COME A PRICE LEVEL BEYOND WHICH SELLING A LARGER QUANTITY AT A LOWER PRICE WILL GENERATE LESS TOTAL REVENUE THAN SELLING A SMALLER QUANTITY AT A HIGHER PRICE AND VICE VERSA.
--TOTAL REVENUE & PED--
"...if we look at the PED values at each price change something very obvious is visible, can you spot it?"
WE CAN CLEARLY SEE THAT WHEN THE PED IS ELASTIC,...
LOWERING THE PRICE RESULTS IN INCREASING TOTAL REVENUE, AND
RAISING THE PRICE RESULTS IN DECREASING TOTAL REVENUE.
WE CAN CLEARLY SEE THAT WHEN THE PED IS INELASTIC,...
LOWERING THE PRICE RESULTS IN DECREASING TOTAL REVENUE, AND
RAISING THE PRICE RESULTS IN INCREASING TOTAL REVENUE.
--TASK--
--TASK--
"If price RISES and the PED is ELASTIC then TR?"
"If price RISES and the PED is INELASTIC then TR?"
"If price FALLS and the PED is ELASTIC then TR?"
"If price FALLS and the PED is INELASTIC then TR?"
--INELASTIC--
--INELASTIC--
-IF THE PRICE ⬆️from P1 to P2, the GAIN IN TR (area ‘C’) is MORE THAN the LOSS IN TR (area ‘B’), hence TR ⬇️.
-IF THE PRICE ⬇️ from P2 to P1, the GAIN IN TR (area ‘B’) is LESS THAN the LOSS IN TR (area ‘C’), hence TR ⬇️.
--ELASTIC--
--ELASTIC--
-IF THE PRICE RISES from P1 to P2, the GAIN IN TR (area ‘C’) is LESS THAN the LOSS IN TR (area ‘B’), hence TR FALLS.
-IF THE PRICE FALLS from P2 to P1, the GAIN IN TR (area ‘B’) is MORE THAN the LOSS IN TR (area ‘C’), hence TR RISES.
--PAST PAPERS--
--PAST PAPERS--
4-MARKERS
EDGE Explain the possible effect on EDGE if the prices of its products are reduced.
YOGO Identify and explain two possible pricing methods that Amelia might use.
6-MARKERS
KARA Explain two factors Kara should consider when deciding whether to increase prices.
BFF Do you think BFF should increase its prices? Justify your answer.
GKA Do you think GKA should change its pricing strategy as the business expands? Justify.
SOLS Identify and explain one advantage and one disadvantage to SOLS of using cost plus pricing.
DCP Do you think that charging a higher price is the best way for DCP to increase profit? Justify.
ELLA Identify and explain one advantage and one disadvantage to Ella of using price skimming.
12-MARKERS
Case study link (VC) Consider the following three pricing methods [Penetration pricing, Price skimming & Cost-plus pricing] VC could use for its new products. Which method should Peter choose? Justify your answer.
Case study link (GS) Consider the following three pricing strategies GS could use when selling plants and trees to customers [Cost-plus pricing, Competitive pricing & Promotional pricing]. Recommend which is the best pricing strategy to choose to increase GS’s profit. Justify your answer.
Case study link (TP) Jennifer wants to increase sales. Consider the advantages and disadvantages of each of the following three pricing strategies TP could use to increase sales [Cost-plus pricing, Competitive pricing & Price skimming]. Recommend which is the best pricing strategy for TP to use. Justify your answer.
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