LESSON 4

Price

Price is an element of the marketing mix:

• Price
• Place
• Product
• Promotion

 High Price

The price is more likely to be high if:

• The product is heavily branded
• There are limited competitors
• Incomes are high
• Demand is price inelastic
• There are few available substitutes
• The product/service has a USP
• Unit costs are high
• The item is exclusive
• Distribution is limited
• The good is at the growth stage of the life cycle
• The firm is following a skimming strategy

Factors Influencing Price:

The price of a good or service depends on:

• Costs- organizations will generally want to cover their costs to make a profit for investment and to reward their owners
• Demand and price elasticity- i.e. what is the level of demand and how sensitive is demand to price?
• Competition- i.e. how similar are their products? What price are they charging?
• Government- e.g. the government places indirect taxes (such as VAT) on most goods, which increases costs.
• Objectives- e.g. short term or long term profits
• Stage of the life cycle- e.g. the price is more likely to increase in the growth phase and fall in decline
• Rest of the mix- e.g. is it positioned as a more exclusive item than competitors’ prodcuts?

Methods of Pricing:

Price Skimming – firms enter the market at a high initial price to cover initial research and development costs quickly. Suitable for an innovative or protected product (e.g. a patent) and where demand is price inelastic.

Penetration Pricing - firms enter the market at a low price to gain market share quickly. Suitable when there are substantial economies of scale or when demand is price sensitive.

Competitor Based Pricing - firms enter the market with prices relative to other competitors. Suitable when the market is competitive and price comparisons are easy, e.g. shopping goods.

Demand-Based or Perceived Value Pricing - firm tries to estimate what people are willing to pay. This is the most market-oriented approach, but it can be difficult to discover what people are willing to pay without thorough market research.

Cost Plus Pricing - the firm adds an amount on to unit costs to decide on the price. This is a simple and therefore, popular pricing method, but ignores demand conditions.

Predatory Pricing - a firm undercuts competitors in an attempt to remove competition. Once competitors are driven out the market, the price is increased again. This policy can lead to a price war in which all firms try to undercut each other.

Price Discrimination - charging different prices for the same product/service.

Loss Leader - product sold below cost to generate orders for other products e.g. retailers put well-known brand in shop windows and sell at a loss to attract people into the store.

Psychological Pricing - focuses on consumer’s perception of price, e.g. charging high prices to convey quality etc.