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BUSINESS STUDIES YEAR 11 A & B

Chapter 20 Marketing Mix: Price

Pricing - Introduction


Setting the right price is an important part of effective marketing . It is the only part of the marketing mix that generates revenue (product, promotion and place are all about marketing costs). Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change.

Put simply, price is the amount of money or goods for which a thing is bought or sold.


The price of a product may be seen as a financial expression of the value of that product. For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items.

 

A customers motivation to purchase a product comes firstly from a need and a want: Example: Need: "I need to eat Want: I would like to go out for a meal tonight") The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. "I really fancy a McDonalds"). The perception of the value of a product varies from customer to customer, because perceptions of benefits and costs vary. In general, a products perceived value may be increased in one of two ways either by:

(1) Increasing the benefits that the product will deliver, or, (2) Reducing the cost. For consumers, the PRICE of a product is the most obvious indicator of cost - hence the need to get product pricing right.

Role of Price in the Marketing Mix




Must choose a price which fit in the rest of the marketing mix Example: High quality product aimed at the rich with exquisite packaging but low price customers might not buy as they thought it is of low quality If in a competitive market prices are set quite similar to the competitors If in a unique market customers might be willing to buy at a high price

Price Determination Free Market




If the products are similar (e.g. rice) prices will be determined by supply & demand If in competitors prices again will be determined by supply & demand businesses have to charge the MARKET PRICE for their products

Before we go ahead with pricing strategies we should be familiar with Price mechanism. mechanism.  Price of any product is influence by its demand and supply.  Law of demand: if Price rises demand falls because people will not be able to buy the same quantity of product with the same money they have.  Law of supply: price rises supply rises because more and more suppliers will be willing to sell the product as there is more profit.  Price of the product in the market is determined at the price level where the demand equals the supply.

Demand


Demand is NOT just what people want to buy, they must also have the $$$ to purchase the product Demand depends on the prices charged. If P , Demand as fewer people will buy. If P , Demand as more people will buy. Sales will See Example

 

Price of Chocolate bar ($) 2.50 2.25 2.00 1.75 1.50 1.25 1.00

Qty Demanded of chocolate bars/ week (000s) 1,000 2,000 3,000 4,000 5,000 6,000 7,000

When chocolate bar is @ $1.00, 7,000,000 chocolate bars will be bought If price to $2.00. only 3,000,000 will be bought

Demand Curve
De and c
3 2.5 Price ($) 2 1.5 1 0.5 0 1 2 3 4 5 6 7 Qty de anded/ week (0,000,000)

ve for choc bar

As P , Demand for chocolate bars

Supply


Supply of a product also varies with price As prices , producer will want to sell/ supply more ( ) to take advantage of higher price A supply curve will slope in the opposite direction of the demand curve Example

Price of Chocolate bar ($) 2.50 2.25 2.00 1.75 1.50 1.25 1.00

Qty Supplied of chocolate bars/ week (000s) 7,000 6,000 5,000 4,000 3,000 2,000 1,000

When chocolate bar is @ $1.00, 1,000,000 chocolate bars will be supplied If price to $2.00. 5,000,000 will be bought

Before we go ahead with pricing strategies we should be familiar with Price mechanism. Price of any product is influence by its demand and supply. Law of demand: if Price rises demand falls because people will not be able to buy the same quantity of product with the same money they have. Law of supply: price rises supply rises because more and more suppliers will be willing to sell the product as there is more profit.

Market Price


For the market price to be decided, the supply curve and the demand curve must be on the same graph. Where the line intersect will be the market price

Factors that affect demand



1.

2.

  

s in the prices of other products Substitute products Used in place of another product. If P for substitute , more substitute product will be bought and demand for original product will Products tend to be bought & consumed together. If one product is bought less, the other demand will also s in income s in taste and fashion sin advertising

Factors that affect supply




  

s in the cost of supplying the product to the market If expensive, then supply will fall Improvement in technology Taxes Climate & weather

DO ACTIVITY 20.2 Page 307

Pricing Strategies


Cost Plus Pricing It involves estimating how many of the product will be produced, then calculating the total cost of producing this output and finally adding a percentage mark-up for profit. mark(Total Cost/Output)* % mark-up=Selling price markPenetration Pricing Involves setting the price lower than the competitors prices. This strategy is usually followed where there is a lot of competition and the product launched may not be unique.

Price Skimming This is where the product is launched at a premium price. It is common with products which are a new invention and people are willing to pay a premium price because of the novelty factors. It is quite common with Mobile phones and other technological products. Competitive Pricing It involves setting the prices in line with the competitors price or just below their prices. Promotional Pricing It involves reducing the price of product for a limited period of time. Summer sales are an example of Promotional pricing. Psychological Pricing Particular attention is paid to the effect that the price of a product will have upon customers perception of the product

Strategy Cost-plus pricing

Description Setting a price by adding a fixed amount or percentage to the cost of making the product

Penetration pricing Setting a very low price to gain as many sales as possible Price skimming Predatory pricing Setting a high price before other competitors come into the market Setting a very low price to knock out all the other competition

Competitor pricing Setting a price based on competitors prices Price discrimination Psychological pricing Setting different prices for the same good, but to different markets e.g. peak and off peak mobile phone calls Setting a price just below a large number to make it seem smaller e.g. 9.99 not 10

A new business that is entering the market might try the following strategies: If they are first into the market then they might use price SKIMMING. If they are trying to establish themselves in the market then PENETRATION pricing. Sometimes a business may use a loss leader. This is a product leader. where the price is so low that the retailer may not make any profit or even a loss on the sale, but does attract shoppers to buy other full price products. Orange juice has been used by businesses such as Rank Hovis McDougall to entice supermarkets to stock more of their other products. Price skimming has been used for the launch of high technology products, such as DVD players and Personal Digital Assistants ( PDA s ) - which were far more expensive than they are now when they first arrived in the market.

Exercise


Do activity 20.3 page 311 Do activity 20.4 page 311