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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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(1) Cost plus pricing
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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(1) Cost plus pricing
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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(1) Cost plus pricing
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 ).