Using the Marketing Mix: Pricing

“Price is what you pay. Value is what you get.”

Warren Buffett

2nd richest American

Using the Marketing Mix: PricingIn this topic you will learn about:

Pricing strategies

Pricing tactics

Influences on pricing decisions

Why is this priced at £85

Why is this priced at £85

Nearly Mother’s Day

Expensive style flowers

Includes the vase

Created by award winning designer!

Interflora

Why is this priced at £5,995?

2 x Michael Jackson Tickets Saturday 18th July-O2 Arena

Why is this priced at…

2 x Michael Jackson Tickets Saturday 18th July-O2 ArenaThriller Hospitality Package & Seats in Block A22 Tickets in block A2 Champagne on arrivalPre-show party in private facilityDJ and entertainmentRed carpet VIP check in and fast track entryGoody bagSouvenir tour laminateAfter show partyParking/Thames Clipper ticket

What factors influence the price charged?

Factors that Influence Price

The type of product

The cost of producing the product

The ability of customers to pay

The level of demand

Competitors

Pricing Strategies…

Pricing strategies

Firms use a number of pricing strategies in order to sell their products. The AQA specification states that you need to know the following:

Price skimming – setting a high initial price for a new product in order to recoup costs

Price penetration – setting a low initial price for a new product in order to get a foothold in the market

Price leaders – where firms that dominate a market with an existing product set the price and other firms in the market follow suit

Price takers – where firms set their prices based on the market price

Price skimming

Price skimming – setting a high initial price for a new product in order to recoup costs.

When a firm releases a new product it often charges a high price targeting a segment of the market known as ‘early adopters’.

These are customers who must have the product as soon as it is launched and are prepared to pay high prices to get it.

Firms often base their initial promotional campaign around this idea, trying to create a ‘must have’ mentality amongst their target market. Once this market has been ‘skimmed off’ the company will lower price.

Price skimming

When Sony released PS3 in 2007 the price

was a hefty £425.

Why do you think that Sony charged such a high price when they released the PS3?

What do you think has happened to the price of the PS3 today?

You will need access to the internet to watch this video clip

£389

Price penetration

Price penetration – setting a low initial price for a new product in order to get a foothold in the market.

This is the opposite of price skimming. Here, a firm will release a new product at a low price with the aim of enticing people to buy. The aim is to gain an early customer base.

Once the product has been launched and built up a customer base the firm will raise the price.

Price Leaders/Price Takers

Price leaders are when firms that dominate a market with an existing product set the price and other firms in the market follow suit.

It is illegal for firms to get together to set prices in order to increase the total value of the market.

Smaller firms will sometimes look to the largest firm in the market to set the price and then follow this price lead. If the smaller firm were to lower their price below that set by the price leader it might start a price war that it has no hope of winning.

Price leaders/Price takersPrice takers are smaller firms in the market who set their prices based on the market price. This might be the price set by the market leader or it might be in a very competitive market where firms sell similar products and customers find it hard to differentiate the product.

If the small firm were to lower price in order to increase market share all other firms would have to follow suit and the customer, rather than the firm, would benefit from lower prices.

A price leader is likely to respond to a smaller firm cutting prices by cutting prices themselves. The small firm would be unlikely to do this because it would retain the same market share but at a lower selling price.

Loss leadersThe selling of products at or below the cost of making the product.

Loss leaders are commonplace in retailing. The idea of a loss leader is to entice the customer into the store in the hope that they will spend money on other, full priced products.

Loss leaders are likely to be heavily advertised so that potential customers are aware of the low price.

When Harry Potter was released stores sold it at such a low price that they didn’t even make a profit:

Why would a firm do this?You will need access to the internet to watch this video clip

Psychological pricing

Psychological pricing occurs when the firm set a price for the product in order to entice the customer into making a purchase.

A common example of psychological pricing is when a firm charges £9.99 rather than £10.00.

Other Pricing strategies…

Destroyer Pricing

Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

Anti-competitive and illegal if it can be proved

Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery

Price Discrimination

Charging a different price for the same good/service in different markets

Requires each market to be impenetrable

Requires different price elasticity of demand in each market

Price Discrimination

Other examples

Nightclubs – early entry, ladies nights

Cinema – student, OAP prices

Contribution Pricing

Contribution = Selling Price – Variable (direct costs)

Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs

Similar in principle to marginal cost pricing

Break-even analysis might be useful in such circumstances

Your task….

HANDOUTS

You will each be given a different handout

Clearly write onto your ‘poster’ – they will be posted around the room!

What pricing method do you think has been used?

What other reasons do you think there are behind the price charged?

Pricing Strategy

Using your 2nd handout

Identify as many products that use that type of pricing strategy…

Price Taker Give me some examples of products or

companies that use this pricing

strategy

Psychological PricingGive me some examples of products or

companies that use this pricing

strategy

Going Rate (Price Leadership)Give me some examples of products or

companies that use this pricing

strategy

Price DiscriminationGive me some examples of products or

companies that use this pricing

strategy

Market SkimmingGive me some examples of products or

companies that use this pricing

strategy

Penetration PricingGive me some examples of products or

companies that use this pricing

strategy

Homework.

Textbook – read unit 28 p206 – 210

DO the Analysis Skills Q 1 electric toothbrush…

Analyse the factors that are likely to determine the price set for the new product. (8 marks)

To what extent will the price determine the success of the product? (12 marks)