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4.5(b) : Price

​What is price

  • •Price is the amount a customer pays for a product or service. It's a critical part of marketing strategy, as poor pricing can lead to product failure.

  • •Businesses face the challenge of setting a price that's both competitive and profitable. Setting a price too high can deter customers, while setting it too low can lead to stock shortages and dissatisfied customers.

  • •Price also affects a company's corporate image. Luxury brands like Omega or Gucci benefit from high prices, as lower prices can damage their reputation.

  • •

Cost-Plus Pricing:

  • •Method: Adds a fixed percentage (mark-up) to the unit cost to determine the selling price.

  • •Example: A coffee shop with a $2 average cost and a 100% mark-up sets the price at $4.

  • •Pros: Simple and easy to calculate.

  • •Cons: Relies on intuition, not market research.

  • •

​Penetration Pricing

  • •Method: Setting a low price to enter an industry and gain market share.

  • •Strategy: Often used with heavily advertised discounts to attract customers quickly.

  • •Benefits: Allows for brand awareness and recognition, can be raised later.

  • •Example: Brilliance Auto launched cars in Europe at a lower price than competitors.

​Loss Leader Pricing

  • •Loss leader pricing involves selling a product below its cost price to attract customers.

  • •Commonly used: Supermarkets use this strategy to attract customers who often end up buying other, higher-margin products.

  • •Brand Switching: Loss leaders can encourage customers to switch to a new brand, leading to long-term gains.

  • •Games Console Industry: Manufacturers sell hardware at a loss to attract buyers, hoping to recoup losses through sales of games, accessories, and subscription services.

  • •

Predatory Pricing

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Premium Pricing

  • •Premium pricing involves setting a significantly higher price than competitors for a product perceived as:

  • •Higher quality: Examples include Nike and Adidas in sportswear.

  • •Unique: Customers perceive owning them as a status symbol (e.g., Honda NSX supercar vs. Honda Jazz).

  • •Benefits:

  • •Higher profit margins

  • •Strong brand image and value

  • •Barriers to entry for competitors (loyal customer base)

  • •Drawbacks:

  • •Limited customer base due to high price

  • •Potential loss of status if appealing to the mass market

  • •Requires strong and expensive-to-maintain brand loyalty

  • •

​Dynamic Pricing

  • •Dynamic pricing is a pricing strategy where prices are adjusted based on real-time market conditions.

  • •Flexibility: Businesses can change prices throughout the day to capitalize on demand fluctuations.

  • •Factors: Time of day, day of week, consumer demand, location, competitor prices are considered when setting dynamic prices.

  • •Examples: Airlines, cinemas, hotels, ride-sharing services.

  • •Advantages:

  • •Greater pricing control

  • •Optimized profits

  • •Disadvantages:

  • •Customer dissatisfaction due to unpredictable prices

  • •Potential for price wars and unsustainable pricing practices

  • •

​Competitive Pricing

  • •Competitive pricing sets prices at the same or similar level as competitors. It's also called "going-rate pricing" and is common in markets with many substitutes.

  • •Three options:

  • 1.Pricing above competition: Justified by extra features or services.

  • 2.Pricing at the same level: Focus on brand differentiation.

  • 3.Pricing below competition: Can be risky for brand image and profits.

  • •Advantages:

  • •Simple and requires minimal effort.

  • •Maintains competitiveness.

  • •Disadvantages:

  • •Requires non-price differentiation (e.g., advertising, customer service) to attract customers.

  • •

Contribution Pricing

  • •Contribution pricing sets prices based on the direct costs of producing a good or service.

  • •Aim: Ensure the selling price covers direct costs and contributes towards covering fixed costs.

  • •Calculation: Contribution per unit = Selling price - Direct cost per unit.

  • •Example:

  • •Selling price: $8

  • •Direct costs: $3

  • •Contribution per unit: $5

  • •This means every product sold contributes $5 towards covering the company's fixed costs.

  • •Advantages:

  • •Ensures covering direct costs and contributing to fixed costs.

  • •Helps avoid making a loss on individual sales.

  • •Limitations:

  • •Allocating indirect costs can be subjective.

  • •Needs to be checked for competitiveness.

  • •

​PED and the key concepts

  • PED measures how responsive demand is to price changes.

  • •Inelastic: Small change in quantity demanded with a price change (customers not very responsive).

  • •Elastic: Large change in quantity demanded with a price change (customers very responsive).

  • Calculation: PED = (% change in quantity demanded) / (% change in price)

  • Interpreting PED:

  • •PED < 1: Price inelastic (increase price, increase revenue)

  • •PED = 1: Unitary price elasticity (price change doesn't affect revenue)

  • •PED > 1: Price elastic (decrease price, increase revenue)

  • Example:

  • •Cinema tickets: Price increase from $7 to $8, demand falls from 4,000 to 3,000.

  • •PED = 25% / 14.28% = 1.75

  • •Demand is price elastic (increase in price leads to a larger decrease in demand).

Importance of PED

  • Importance of PED for Businesses:

  • •Pricing policy: Helps determine if price increases or decreases will increase revenue.

  • •Economic downturns: Identifies products most affected by recessions.

  • •Exchange rate fluctuations: Predicts the impact of exchange rate changes on exports.

  • •Government taxation: Helps governments determine optimal tax levels on products.

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