The Marketing Mix Pricing Pricing Strategies l Price

The Marketing Mix Pricing

Pricing Strategies l Price skimming l l l A high price set to yield a high profit margin Long-term or short-term strategy (early adopters) Penetration pricing l Low prices are set to break into a market or to achieve a sudden spurt in market share

Pricing Strategies l Price leadership l l Price taking l l A small firm follows the price set by a price leader Predator or Destroyer pricing l l A large company (the price leader) sets a market price that smaller firms will tend to follow Firm sets a very low price in order to drive other firms out of the market – sole objective is to reduce number of competitors Discrimination pricing l Charging different prices to different customers for the same product or service

Pricing tactics l l Loss leaders Psychological pricing

Influences on the pricing decision l Costs of production l l Cost-plus pricing (cost + a mark-up) Price elasticity of demand

Cost-plus pricing l Level of mark-up depends upon: l l l Level of competition Price that customers are prepared to pay Firm’s objectives

Price elasticity of demand l P. O. D. = % change in quantity demanded % change in price l Price elasticity of demand can be elastic, inelastic or unitary

Price elasticity of demand l Elastic l l l Inelastic l l l % change in price leads to a greater % change in quantity demanded Number is greater than 1 % change in price leads to a smaller % change in quantity demanded Number is smaller than 1 Unit elasticity l Price change is exactly cancelled out by the change in quantity demanded so sales revenue stays the same

Determinants of PED l l l Necessity Habit Availability of substitutes Brand loyalty Proportion of income spent on a product Income of consumers

Significance of PED l Inelastic l l l Price rise always increases sales revenue & profit Price fall leads to lower sales revenue and profit Elastic l l Impact of a price increase is outweighed by relatively large % change in demand, so sales revenue decreases In the case of a price fall, demand increases, but need to understand costs of production in order to see if profits will increase

Difficulties in calculating & using PED l l Other factors not ‘remaining equal’ Competitors’ reactions Consumers’ reactions Market research – reliability of surveys