Transcript 13_Pricing - econbus

Using the Marketing Mix:
Pricing
“Price is what you pay.
Value is what you get.”
Warren Buffett
2nd richest American
Using the Marketing Mix: Pricing
In 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 JulyO2 Arena
Thriller Hospitality Package & Seats in Block
A2
2 Tickets in block A2
Champagne on arrival
Pre-show party in private facility
DJ and entertainment
Red carpet VIP check in and fast track entry
Goody bag
Souvenir tour laminate
After show party
Parking/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.
You will need access to
the internet to watch this
video clip
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?
£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 takers
Price 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 leaders
The 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:
You will need access to
the internet to watch this
video clip
Why would a firm do this?
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
Give me some
Psychological Pricing
examples of
products or
companies that
use this pricing
strategy
Give me some
Going Rate (Price Leadership)
examples of
products or
companies that
use this pricing
strategy
Give me some
Price Discrimination
examples of
products or
companies that
use this pricing
strategy
Market SkimmingGive me some
examples of
products or
companies that
use this pricing
strategy
Give me some
Penetration Pricing
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)