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Using the Marketing Mix: Pricing “Price is what you pay. Value is what you get. ” Warren Buffett 2 nd 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 18 th July-O 2 Arena
Why is this priced at… 2 x Michael Jackson Tickets Saturday 18 th July. O 2 Arena Thriller Hospitality Package & Seats in Block A 2 2 Tickets in block A 2 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 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 – 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 PS 3 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 PS 3? What do you think has happened to the price of the PS 3 today? £ 389
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 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 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
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 2 nd 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 Psychological Pricing me some 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 Price Discrimination me some examples of products or companies that use this pricing strategy
Market Skimming. Give me some examples of products or companies that use this pricing strategy
G Penetration Pricingive me some examples of products or companies that use this pricing strategy
Homework. Textbook – read unit 28 p 206 – 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)