Chapter 20.Price

8/10/2019 Chapter 20.Price

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Setting the right price is an important part of effective

marketing.

Why it is different than the other 3Ps.?

It is the only part of the marketing mix

that generates revenue (product,

promotion and place are all about

marketing costs).


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The level of consumer demand.

The level of competition from rival producers. The cost of production.

Business objective.

Marketing mix.

Taxes and subsides. Elasticity of demand

New or existing product


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Free market priceA price determined

purely by the forces of supply anddemand without interference from an

outside source


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Demand

Demandis the desire to own anything, the ability to pay for

it, and the willingness to pay.
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Substitute products

Complementary products


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Substitutesare goods that can be used in place of

the primary good.

The relationship between the price of the substitute

and the demand for the good in question is positive. If the price of the substitute goes down the demand

for the good in question goes down. (coffee , tea)

Substitute products


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Substitute products


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Complementary are products that tend to be

bought and consumed together.

If the price of sugar rises, then less tea will be

bought and as a result there will be less demand forcoffee.

Complementary products


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complementary products


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Price elasticity of demand The responsiveness ofconsumer demand to a change in price.

A product with an elastic demand curve would have a higherchange in demand than a change in price (uses percentages).

A product with an inelastic demand curve would have a lower

change in demand than a change in price.


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Consumer demand for a product tends to be

price elastic if:-

1. The product has many close substitutes.

2. It is an expensive item.

3. Consumers dontneed to buy it frequently they have time to

search for alternatives.


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Consumer demand for a product tends to be

price elastic if:-

1. The product has few close substitutes.

2. It is a low cost item.

3. It is a necessity that consumers needs to purchase regularly.


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Supply

Supply is the total amount of a good or service available

for purchase.


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Supply

There are TWO types of change in supply

1. Movement ALONGthe supply curve

2. SHIFTS in the supply curve


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Supply

A movement ALONG the supply curve

A movement along the supply curve is caused by a change

in PRICEof the good or service.

For instance, an increase in the price of the good results in

an EXTENSION of supply (quantity supplied will increase),

whilst a decrease in price causes a CONTRACTION of

supply (quantity supplied will decrease).


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Supply

A SHIFT in the supply curve

A shift in the supply curve is caused by a change in anynon-price determinant of supply. The curve can shift to the

right or left.

A rightward shift represents an increase in the quantitysupplied (at all prices) S1 to S2, whilst a leftward shift

represents a decrease in the quantity supplied (at all

prices). S1 to S3.


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Supply

Factors that affect the position of the supply

curve

1. Changes in the costs of supplying the product to the

market

2. Improvements in technology3. Taxes

4. Climate and weather


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Supply

Price elasticity of supply The responsiveness of thesupply of a product to changes in price.

A product with an elastic supply curve would have a higher

change in supply than a change in price (uses percentages).

A product with an inelastic supply curve would have a lower

change in supply than a change in price.


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Pricing

strategies

(1)

Cost based

pricing

Cost-plus

pricing

(2)

Customer

based

pricing

Penetration

pricing

Price

skimming

Psychological

pricing

(3)

In a

competitive

market

Competitive

pricing

Promotional

pricing


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(1) Cost plus pricing

Cost plus pricing It is the average cost of

producing each item or unit of output + markup profit.

The objective is to cover production costs and earn a

good profit.

Price = [total cost / total output] + mark up for profit


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If a firm produces 10,000 packets of biscuits at a

total cost of $10,000 and it wants to make 40%profit in each packet. Calculate the price for each

packet.


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The costs of production for a new toy are $10.

What price should the company sell the new toy

at if it prices at a cost plus profit at 100% profit

mark-up?


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It is easy to apply

It does not take into account what price

consumers may or may not be willing to pay or

how much competition there is.


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(2) penetration pricing

Penetration pricing when the price is set lower

than the competitorsprices to enter new market.

It ensures that sales are made and the new

product enters the market.

High risk strategy and only large businesses may

be able to afford to do it.


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(2) Penetration pricing

The costs of production for a new toy are $10.

The price of competitorsproducts are:-

Product A 25/ product B 20/ product C 23/

product D 22.

What price should the company sell the new toy

at if it prices using penetration pricing?


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(3) Price skimming

pricing strategy used when there is little

competition in a market for a new or improved

product.

It involves charging a high price to recover

development costs and to gain high initial profitfrom those consumers who are willing to pay more

because the product is new or unique.


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(3) Price skimming

Help to establish the product as being of good

quality.

It may put off some potential customers because of

the high price.


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(4) Psychological pricing

Strategies recognize that consumers use price as

an indicator of product value and quality.

Prices influence consumer perceptions of different

products.


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(5)Competitive pricing

When the business set the price in line with or

below competitors' prices.

Sales will be high realisticprices.

Searching for competitors prices waste time and

money.


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(6)promotional pricing

A product is sold at a very low price for a short

period of time.

Getting rid of unwanted stock.

Renew interest in a business if sales are falling.

Lower the sales revenue.


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What pricing strategy would most probably be used for thefollowing products? Explain your answer.

a. A watch that is very similar to other watches sold in the shops.

b. A new type of radio that has been developed and is a lot higher qualitythan existing radios.

c. A chocolate bar which has been on the market for several years andnew brands are being brought out which are competing with it.

d. A shop, which sells food, wants to get its money back on buying thestock and make an extra 75% as well.

e. A new brand of soap powder is launched (there are already manysimilar brands available ).

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Chapter 20.Price