PRICING
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In setting a price for a product the company
will almost certainly want to cover its costs
and make a profit as well.
Firms have to decide whether to charge:
A low price in order to attract sales.
An average price, this means you have to
compete with rivals by other means. e.g.
quality, promotions.
A higher price can be charged if the product
is seen as being better than the rivals.
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Importance of….
Consumers will only pay what they can
afford and what is reasonable for the
product.
Price is used by consumers as a
measure of quality.
High price suggests high quality.
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Factors to be considered
When setting the price, the following
needs to be looked at.
Does the price of the product cover the
costs and production and allows profits
to be made?
The price charged by competitors
Is the market price regulated by the
government eg Petrol?
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Ben Sherman Example
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Short Term Pricing Strategies
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New Products
Skimming
When a new product is released it may
be possible to start off charging a quite
high price. This can be because owning
the product first has some prestige or
novelty attached to it. Many different
prices can be charged as the product
becomes less and less in demand.
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Penetration Pricing
When a firm brings out a new product, it
may feel it needs to make a lot of sales to
establish itself in the marketplace. It can
start off by offering the product at a low
price. When they reach higher levels of
sales and the product becomes
established, they can raise prices.
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Existing Products
Price leader
The market leader will change its price
and its competitors will follow suit.
e.g. when the price of petrol or interest
rates change competitors normally
follow suit
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Price taker
You are a small seller in a large market
selling an identical product, thereby you
have no power to change the price, if
you raise your price you will lose all of
your customers as they will go to a
competitor.
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Tactical Pricing
Cost plus pricing
The cost of a particular job is calculated
then a particular percentage is added
on top. This is sometimes known as a
mark-up. e.g. the total cost of repairing
a television is £100, if a business adds a
20% mark-up it will charge a total of
£120.
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Destroyer Pricing
You sell your good at a very low price in
order to destroy new or existing
competitors.
e.g. the Times newspaper reduced its
price in the 1990’s, other newspapers
followed suit and the result was the
Today newspaper went out of business
in 1995.
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Competitor based Pricing
This type of pricing is suitable when the
market is competitive and price
comparisons are easy.
e.g. goods in supermarkets.
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Price discrimination
A firm will charge different prices to
different people for the same good or
service.
e.g. some taxis charge different prices
late at night, rail fares are higher during
peak periods.
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Loss leader
Some products are sold below cost in
the hope of selling other products.
e.g. retailers put a well known brand
name in shop window at a loss in order
to attract people into the shop.
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Psychological pricing
This focuses on consumers’ perceptions
of price.
e.g. charging high prices to convey
quality or charging £2.99 rather than
£3.00, because people regard it as over
£2.00 rather than in the £3.00 band
and stressing reductions in price (e.g.
was £20 now only £10).
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Low Price Strategy
Where businesses will charge a lower
price than those of competitors.
Consumers will respond positively to
changes in price which will result in
much higher sales.
Normally used when there is little brand
loyalty in the market and high
competition.
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High Price
Used where image is important.
Used by businesses offering high-quality
premium goods and services.
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Promotional Pricing
Used to boost sales by lowering the
price to create interest in the new
product.
Supermarkets use promotional pricing
for some of the sales lines which will
attract customers into buying other
goods whilst in the store.
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Demand-orientated pricing
Price varies with demand for the
product.
Usually used in crop markets.
When harvest is poor, successful
producers can charge a higher price to
to their being limited suppliers.
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