The Marketing Mix: Price

Price is the amount paid by customers.

Factors affecting pricing decisions

 Costs of production :
A price must cover both variable and fixed costs of a business

 Competitive conditions :
1. Monopoly – more freedom in deciding prices
2. Much competition – fix similar prices

 Competitors prices
Difficult to set prices too different from competitors unless true USP is shown

 Business and marketing objectives

Price must reflect all aspects of the marketing mix and should keep in mind the
main objectives of the business

 Price elasticity of demand

Elastic demand – low prices
Inelastic demand – increase prices

 New or existing product

New products – price skimming or penetration pricing

Pricing Methods

1. Cost based pricing

 Mark-up pricing

When a percentage of fixed mark-up is added to the cost of the product

The mark-up size depends on the strength of demand, number of substitutes, stage of
PLC, etc

e.g.
Total Cost of bought-in materials = $40; Firm wants 50% Mark-Up
Therefore, Selling Price = $60 ( 40 + (50% x 40))

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 Cost plus pricing

Setting a price by calculating total unit cost for the product and then add a fixed
profit mark-up.go. Often used by manufacturers.

Total costs for 10000 units = $400000; Targeted profit mark-up = 20%
Therefore, Selling Price = $ 400000+(20% x 400000) / 10000 units
= $48

 Contribution-cost (or marginal-cost) pricing

Prices are set based on the variable costs and a contribution amount for fixed costs
and profit is added

Contribution per unit = selling price – variable cost per unit

Break even point = fixed costs/ contribution

Ensures variable costs are covered and is a flexible method.

Fixed costs may not be covered .

 Loss Leaders

Common tactic used by retailers. Setting up low prices for some products ; at times
even below variable costs to attract customers in the hope that customers will buy
other products too making a positive contribution. E.g low -priced printers lead to
sales of high-priced printer ink.

2. Competition-based pricing

Price is based on that of competitors .

Scenarios where it is suitable:

1. Follow the market leader
2. Avoid a price war e.g petrol companies
3. Destroyer pricing – force others out of the market

 Price discrimination

It involves charging different prices to different consumer groups for the same
product e.g train companies charge lower prices for elderly for the same journey
Different prices charged at different times of the day e.g taxi fares higher at night.

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 Dynamic pricing

Changing prices, frequently, to respond to changes in demand.It is based on demand

level and ability of consumers to pay.Easier with online when prices adjusted
regularly based on demand levels e.g airline companies charge different prices for the
same class and journey.Different prices charged at different times to reflect demand
conditions.

3. Pricing strategies for new products

 Penetration pricing

Involves selling at a low price to attract more customers .

Used by firms in the mass market with a aim to capture a large market share .

 Price/Market skimming

Setting a high price to differentiate product from competitors

Usually for products with inelastic demand (luxury goods)
It creates an exclusive image for the product

4. Psychological Pricing

Setting a price at a level which matches consumers’ views about a product perceived
value.Prices are set based on the value customers place on the product .

 Prices set just below key price levels to make price appear much lower than it is
e.g $19.99, $29.99
 Price levels reflect style and quality of product.High price to create status and
exclusive image- Higher perceived value

Pricing decisions – evaluation

A firm will not use the same pricing strategy for all products as there are differences
in external market conditions .Prices have a huge influence on consumer purchasing
behaviour so market research must be carried out to identify consumers ability to pay
before setting prices .
Low price may not always be considered the best strategy. It may even discourage
consumers if they believe the product is of high value .Price is only one factor. The
complete brand image is more important.
Consumers choose good value means that all aspects of the marketing mix are well
combined and integrated. The image of product justifies the price charged.