3.3.2 PRICE

Central Question

How do you decide on your selling

price?

Factors to consider

• Your costs• Your company objectives• The competition• Your product• The market• The state of the economy• The company or brand image• Your consumers / customers• Exchange rate?

Learning Outcomes

• To 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 contexts

• To understand the significance of Price Elasticity – whether a product is price elastic or inelastic – and how this could impact a pricing decision

Strategy Description Cost-plus

pricing

Setting a price by adding a fixed amount or percentage to the cost of making the product

Penetration

pricing

Setting a very low price to gain as many sales as possible

Price

skimming

Setting a high price before other competitors come into the market

Competitive

pricing

Setting a price based on competitors prices

PromotionalPricing

Offering a special price (discounted) or offer (BOGOF) to try and increase awareness or sales of a product.

The Pricing Strategies

TASK –10 mins

• In 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!

Feedback…

Consider These questions…

• If 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 concept

• The responsiveness of one variable to changes in another

• When price rises what happens to demand?• Demand falls• BUT!• How much does demand fall?

Elasticity – the concept

• If 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

Elasticity

• Price Elasticity of Demand

– The responsiveness of demand to changes in price

– Where % change in demand is greater than %

change in price – elastic– Where % change in demand is less than %

change in price - inelastic

Elasticity

The Formula:

Ped =% Change in Quantity Demanded___________________________

% Change in Price

If answer is between 0 and -1: the relationship is inelastic

If the answer is between -1 and infinity: the relationship is elastic

Note: 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 minutes

• Can you find 3 Price Inelastic goods or services and 3 Price elastic goods or services?

• Why would you categorise them like this?

ElasticityPrice (£)

Quantity Demanded

The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.

Elasticity

Price

Quantity Demanded (000s)

D

The importance of elasticity is the information it provides on the effect on total revenue of changes in price.

£5

100

Total 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

ElasticityPrice

Quantity Demanded (000s)

D

If 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.£5

100

£3

140

Total Revenue

Elasticity

Price (£)

Quantity Demanded

10

D

5

5

6

% Δ Price = -50%

% Δ Quantity Demanded = +20%

Ped = -0.4 (Inelastic)

Total Revenue would fall

Producer decides to lower price to attract sales

Not a good move!

Elasticity

Price (£)

Quantity Demanded

D

10

5 20

Producer decides to reduce price to increase sales

7

% Δ in Price = - 30%

% Δ in Demand = + 300%

Ped = - 10 (Elastic)Total Revenue rises

Good Move!

Elasticity

• If demand is price elastic:

• Increasing price would reduce TR (%Δ Qd > % Δ P)

• Reducing price would increase TR (%Δ Qd > % Δ P)

• If demand is price inelastic:

• Increasing price would increase TR (%Δ Qd < % Δ P)

• Reducing price would reduce TR (%Δ Qd < % Δ P)

Reflection Time – Have we met our objectives?

• To be aware of the costs and benefits of developing new products

• To understand the concept of Brand Image and how this can impact sales and customer loyalty

• To be able to appreciate the role of packaging in the success or failure of a product

• To understand the stages of the Product Life Cycle and possible extension strategies

• To understand how marketing strategies and decisions can differ at each stage of the product life cycle