Central QuestionHow do you decide on your selling price?
Factors to considerYour costsYour company objectivesThe competitionYour productThe marketThe state of the economyThe company or brand imageYour consumers / customersExchange rate?
Learning OutcomesTo understand (benefits and limitations) and be able to apply the following pricing methods:- Cost Plus- Competitive- Penetration- Skimming- Promotional
To be able to evaluate the most suitable pricing strategy in a range of contextsTo understand the significance of Price Elasticity whether a product is price elastic or inelastic and how this could impact a pricing decision
The Pricing Strategies
StrategyDescriptionCost-plus pricingSetting a price by adding a fixed amount or percentage to the cost of making the productPenetration pricingSetting a very low price to gain as many sales as possiblePrice skimmingSetting a high price before other competitors come into the marketCompetitive pricingSetting a price based on competitors pricesPromotionalPricing Offering a special price (discounted) or offer (BOGOF) to try and increase awareness or sales of a product.
TASK 10 minsIn pairs research and identify one product which utilises each pricing method. Be prepared to justify why they are using that method and you will need evidence to support your claims!
Consider These questionsIf you increase your selling price, what is likely to happen?If you decrease your selling price, what is likely to happen?If supply of your product increased what might happen to your selling price?If demand is high and supply is low what could you do to your selling price?What is an ESSENTIAL product or service?What would happen if the selling price of this essential product/service increased?
Price ElasticityYou ONLY need to know about the concept and difference between inelastic and elastic. Do not worry about graphs or calculations. They are just for your interest and further information if you would like to know more!!
Elasticity the conceptThe responsiveness of one variable to changes in anotherWhen price rises what happens to demand?Demand fallsBUT!How much does demand fall?
Elasticity the conceptIf price rises by 10% - what happens to demand?Demand is likely to fall but.By more than 10%?By less than 10%?Elasticity measures the extent to which demand will change
ElasticityPrice Elasticity of Demand
The responsiveness of demand to changes in priceWhere % change in demand is greater than % change in price elasticWhere % change in demand is less than % change in price - inelastic
ElasticityThe Formula:Ped =% Change in Quantity Demanded___________________________% Change in Price If answer is between 0 and -1: the relationship is inelasticIf the answer is between -1 and infinity: the relationship is elasticNote: PED has sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand)
Research Task - 5 minutesCan you find 3 Price Inelastic goods or services and 3 Price elastic goods or services?
Why would you categorise them like this?
ElasticityPrice ()Quantity DemandedThe demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.
ElasticityPriceQuantity Demanded (000s)DThe importance of elasticity is the information it provides on the effect on total revenue of changes in price.5100Total revenue is price x quantity sold. In this example, TR = 5 x 100,000 = 500,000.This value is represented by the grey shaded rectangle.Total Revenue
ElasticityPriceQuantity Demanded (000s)DIf the firm decides to decrease price to (say) 3, the degree of price elasticity of the demand curve would determine the extent of the increase in demand and the change therefore in total revenue.51003140Total Revenue
ElasticityPrice ()Quantity Demanded10D556% Price = -50%% Quantity Demanded = +20%Ped = -0.4 (Inelastic)Total Revenue would fallProducer decides to lower price to attract salesNot a good move!
ElasticityPrice ()Quantity DemandedD10520Producer decides to reduce price to increase sales7% in Price = - 30%% in Demand = + 300%Ped = - 10 (Elastic)Total Revenue risesGood Move!
ElasticityIf demand is price elastic:Increasing price would reduce TR (% Qd > % P)Reducing price would increase TR (% Qd > % P)If demand is price inelastic:Increasing price would increase TR (% Qd < % P)Reducing price would reduce TR (% Qd < % P)
Reflection Time Have we met our objectives?To be aware of the costs and benefits of developing new productsTo understand the concept of Brand Image and how this can impact sales and customer loyaltyTo be able to appreciate the role of packaging in the success or failure of a productTo understand the stages of the Product Life Cycle and possible extension strategiesTo understand how marketing strategies and decisions can differ at each stage of the product life cycle