PRICE • Price is only one of the factors that affects a buyer’s purchasing decision. • It is an important indicator of quality and image and provides customers with a way of making a judgement about value for money • Importance of price can vary tremendously depending on the product. • Price is the only part of the marketing mix that will make a producer money – Product, Place and Distribution all cost a firm.
DECISIONS REGARDING PRICE Decisions need to be made when: • A price needs to be set for the first time, eg when a new product is launched on the market. • it becomes necessary to adjust price of an existing product according to its stage in the product life cycle or what competitors are charging
FACTORS AFFECTING PRICING DECISIONS When setting price there are a number of factors to consider: • The organisaiton’s objectives - eg maximise sales • The marketing mix - price must complement the other elements of the mix • Costs - must set a price which covers costs the cost of production • Competition- price may be determined by other sellers • Consumer perceptions- too low a price may raise suspicions re quality • Legal constraints – some markets are regulated by government; eg the government wants unleaded petrol to be cheaper than leaded.
PRICING STRATEGIES Where a company can choose to set the price of a product there are a number of pricing strategies or policies it might choose from. • These strategies can be either long term or short term
LONG TERM PRICING STRATEGIES Companies can adopt different pricing strategies for different products and different market conditions: Low Price Strategy: price is set lower than the competition: • consumers react positively to lower prices so sales increase • competition in the market is high • little brand loyalty exist in the market • Eg: supermarkets attract high volume sales of DVDs and computer games by charging lower than market prices High Price Strategy:(can be either long or short term) Long term pricing strategy adopted by firms offering high quality premium goods: • Image is very important • High Brand loyalty • Choice of distribution channel will reflect high price.
LONG TERM PRICING STRATEGIES Cont’d Market Price Strategy price is set broadly in-line with competitors. • Used where price competition does not benefit any of the producers • Is successful where there are few large companies and very little difference between competitors’ products. • Eg: Petrol companies Discrimination or Demand-oriented Pricing Strategy (can also be short term) different prices are charged to different groups of consumers for the same product. • Eg: BT charges higher rates for telephone calls at certain times of the day. • Train tickets for the same journey vary in price depending on the time of day
Price Task 1 • Describe long term pricing strategies an organisation might use when setting the price of a product. ( 4 marks)
Solution High price – Price set is considered to be expensive. This is a pricing strategy adopted by firms offering high quality premium goods. High price is appropriate where image is very important and there is high Brand loyalty. Low Price - where price is set lower than the competition. Appropriate where competition in the market is high as consumers are likely to react positively to lower prices so sales increase. Market price – Price is set at roughly the same level as the competition. This is used where price competition does not benefit any of the producers. It is successful where there are few large companies and very little difference between competitors’ products. Demand-orientated price - Different prices are charged to different groups of consumers for the same product. Used to target the same product to different market segments.
Short Term Pricing StrategiesPenetration Pricing Used when introducing a new product to an established market where competition is high. When launched, the product is priced much lower than the Competition: • Encourages customers to establish the habit of buying the product • Helps the business to gain market share quickly • Retailers and wholesalers are likely to purchase large quantities • When product becomes established firm will raise prices in line with competition
Short Term Pricing StrategiesDestroyer Pricing An established product is priced well below that of competitors. • Idea is to eliminate the competition • prices are set artificially low and firm will sustain losses • Once competition is eliminated prices will rise • May be considered anti-competitive by Government and could result in legal action.
Short term pricing Strategies Skimming Using a high price initially for a new product where there is little or no competition. • Consumers are willing to pay for the novelty value of the product • Status in ownership of the product (plasma screens, play station 3, iphone) • Price reduces when competition enters the market or technology overtakes Promotional Pricing Used to boost sales temporarily • Lower (sale) prices; loss leaders; BOGOFs • Loss leaders attract customers into the store who may then purchase normal priced items
Price Task 2 • Describe short term pricing strategies an organisation might use when setting the price of a product. (4 marks) • Explain short term pricing strategies an organisation might use when setting the price of a product. (4 marks)
Solution • Skimming – new product launched at a high price where there is little or no competition. Once the first segment of consumers is saturated the price goes down. For example, PlayStation • Destroyer pricing- used for existing products. Price is lowered to an artificially low level in order to eliminate competition. It generally leads to short term loses but with a view to future benefits. One competition has been eliminated prices will rise again. • Penetration pricing – Involves setting a low price on a new product to enter an existing market where there is likely to be strong competition. This may result in initial losses but can overcome brand loyalty. Prices rise again when product becomes established.` • Promotional Pricing – prices are lowered for a short period of time in the hope that customers will purchase increased quantities of the product. It is usually used in order to inject fresh life into an existing product. Loss leaders attract customers into the store who may then purchase normal priced items.
Price and the Marketing Mix • Prices may vary in the short term to achieve certain marketing objectives, but in the long run pricing decisions are seldom taken in isolation from the other factors in the marketing mix • Alterations in price will frequently be accompanied by changes in promotion, advertising, packaging and ever distribution channel
Examples • What are the names given to the following types of pricing? 1. A night club charging £20 for entry after midnight and £15 before 2. A kilt manufacturer charging for a tailor-made kilt 3. A market stall holder charging 5p less for apples than a neighbouring stall holder
Answers • A night club charging £20 for entry after midnight and £15 before - Discriminatory pricing • A kilt manufacturer charging for a tailor-made kilt – high/premium pricing • A market stall holder charging 5p less for apples than a neighbouring stall holder - competitive pricing or destroyer pricing