Chapter 32: Using the Marketing Mix

Pricing

Pricing Strategies

• Price Skimming – high price is set to yield a high profit margin, usually during the introduction of a product

• Penetration Pricing – low prices are set to break into a market or to achieve rapid growth in market share

• Price Leadership and Price Taking – in price leadership a large company (the price leader) sets a market price that smaller firms (price takers) tend to follow)

• Predator (or destroyer) Pricing – when a firm sets very low prices in order to drive other firms out of the market

Pricing Tactics

• A pricing approach or technique used in the short term to achieve specific objectives

• Loss Leaders – setting low prices for certain products in order to encourage consumers to buy other, fully priced products

• Psychological Pricing – intended to give the impression of value (ie: £9.99 instead of £10)

Influences on the pricing decision• Costs of Production (in cost-plus pricing, a

mark-up percentage is added to the average cost of producing a product)

• Price Elasticity of Demand – the responsiveness of a change in the quantity demanded to a change in pricePrice elasticity = % change in quantity demanded

of Demand % change in price

Elastic Demand – greater than 1

Inelastic Demand – less than 1

IGNORE THE MINUS SIGN

Factors influencing price elasticity of demand

• Necessity

• Habit

• Availability of Substitutes

• Brand Loyalty

• Proportion of Income spent on a product

• Income of consumers

Difficulties in calculating and using price elasticity of demand

• Price elasticity of demand calculations assume that ‘other things remain equal’ while price changes . . . In practice, this does not happen

• There may have been significant changes in the market, affecting the level of demand independently of price

• Competitors’ reactions• Consumers’ reactions• Market research