Transcript Unit 3 – Decision making to improve marketing performance

Unit 3 – Decision making to improve marketing performance
3.4 – Using the
marketing mix:
Price
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Unit 3 – Decision making to improve marketing performance
Learning outcomes
Making marketing decisions: Using the marketing
mix
What you need to know:
• The elements of the marketing mix (7Ps)
• The influences on and effects of the changes in
the elements of the marketing mix
• Pricing decisions
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Unit 3 – Decision making to improve marketing performance
Making marketing decisions: Using the marketing mix:
Product
Physical
environment
Product
Price
Process
People
Promotion
Place
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Unit 3 – Decision making to improve marketing performance
Starter discussion:
What factors may determine how much a firm
charges for its products?
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Unit 3 – Decision making to improve marketing performance
Factors impacting on price charged
(explain in 1 sentence why each of these impact price)
There are several factors a business needs to consider in setting the price:
• Competitors’ products and prices
• Costs of production, promotion, etc.
• Market conditions, for example, demand levels, accepted prices, market
share, etc.
• The state of the economy and its impact on consumers’ disposable income
• The bargaining power of customers in the target market – Do they sell to
consumers or businesses?
• Location of the business
• Brand image, reputation and customer loyalty
• Product quality and packaging
• Price elasticity of demand – Is the product elastic or inelastic?
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Unit 3 – Decision making to improve marketing performance
Pricing strategies
• There are two pricing strategies that can be used by firms when they are first
launched into the market:
1.
Penetration pricing: Low prices are charged to help attract customers; to
gain a foothold in the market and establish market share. It is commonly
used with new food products.
2.
Price skimming: High price are charged to gain a high profit margin from
early adopters. It is commonly used when the business has already
established a strong brand image and has a loyal customer base, for
example, Apple.
Early adopters are people who are willing to pay high prices to purchase
products when they are first launched. Very common in technology markets such
as games consoles and phones.
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Unit 3 – Decision making to improve marketing performance
Price
Pricing strategies
Price
skimming
Penetration
pricing
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Demand/Time
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Unit 3 – Decision making to improve marketing performance
Other pricing strategies and methods
• Price leadership and price taking – Large market leading firms, known as
price leaders, are able to set the price in a market as they have the
market power. This may be because they have a strong USP, brand image
or customer loyalty. Smaller rivals, known as price takers, which do not
have as much market power take the accepted price and follow.
• Predator (or destroyer) pricing – Firm sets very low prices in order to
drive other firms out of the market.
• Premium pricing – Charging high prices for high quality goods, for
example, luxury cars, holidays, clothes or jewellery.
• Seasonal pricing – Different prices are charged depending on the level of
demand. In peak seasons higher prices can be charged and vice versa.
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Unit 3 – Decision making to improve marketing performance
Other pricing strategies and methods
• Loss leaders – A short-term tactic where firms set lower prices than usual to
attract customers who they hope will buy other full-priced products. Very
common in supermarkets, mobile phone contracts where the handset is free
and mobile games where the game is free but you then have in-app
purchases.
• Psychological pricing – Prices are set to appear lower to the consumer, for
example, products sold for £9.99 or not including add-on fees such as only
advertising the entrance fee for paintballing but not the cost of paintballs
needed to play.
• Price discrimination – Higher price are charged to some customers for the
same product/service, for example, taxis, train fares.
• Cost-plus pricing – The average cost of producing a product plus a sum to
ensure profit is made.
• Mark up – The percentage added to a product to ensure a profit is made.
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Unit 3 – Decision making to improve marketing performance
Price elasticity of demand (PED)
•
This measures the responsiveness (or sensitivity) of demand to a change in price
PED =
percentage change in quantity demanded
percentage change in price
•
Elastic goods = an answer greater than 1, where demand will change with a price change.
The higher the number the more elastic the product is and more demand will change as
price changes.
•
Inelastic goods = Less than 1, where demand is relatively unresponsive to a change in
price. The smaller the decimal the more inelastic it is. If prices increase there will be little
to no impact on demand.
•
Unitary elasticity = an elasticity of 1, any price change is cancelled out by the demand
change. [Used in PP3.2b]
•
Elasticity will always be a negative figure as when price goes up demand falls and when
prices fall demand rises. The relationship between these variables is opposite and
therefore negative.
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Unit 3 – Decision making to improve marketing performance
Discussion:
What factors may determine how elastic or
inelastic a product is?
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Unit 3 – Decision making to improve marketing performance
Example and exam-style questions
When Sony first released the PlayStation 3 in 2006 they sold it at a loss. It cost
about $805 to build and initially sold for $599. Over time costs and prices came
down and by 2009 the PS3 was selling for $299 at a cost of $336 to build. The PS4
costs approximately $381 and when launched sold for a $399 retail price, only an
$18 difference. These small profit margins are rare in consumer electronics. For
example, Apple’s iPad Air sells for a minimum of $499 at retail, yet costs up to $274
to build.
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Unit 3 – Decision making to improve marketing performance
Example and exam-style questions
Questions:
1. Analyse why you believe Sony decided to sell its PS4 console using a
loss leader strategy on its launch? (6 marks)
2. Explain the factors that might influence the price at which Sony sells its
games consoles. (6 marks)
3. Discuss whether Sony was right to use price skimming on the launch of
the PS4? Justify your view. (16 marks)
Exam tip:
• Use a supported judgement in the final paragraph to answer the actual
question asked. Support your judgement using key points from the case.
• You may also wish to discuss the judgement in the short and long term
to build a more in-depth final evaluation
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Unit 3 – Decision making to improve marketing performance
Summary
• The price set by a firm is decided by a wide range of factors.
• It is also one of the most important parts of the marketing mix
to get right as it is a key part of the consumer buying decision.
• Many firms do not like to compete on price as it may trigger a
price war.
• If firms constantly undercut each other to attract customers
the only result is profit margins falling and the only
stakeholder that benefits is the consumer.
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