CHAPTER 10PRICE

part three: the marketing mix

an opening challenge

You run a medium-sized business: a second-hand car dealership. A competitor, the showroom on the other side of town, reduces its prices. Should you do the same? What will happen if you don’t? If you do?

agenda

• pricing objectives• pricing methods– market-based– cost-based

• pricing strategies• pricing tactics• changing prices• price elasticity of demand

the importance of pricing

• profits and revenues– maximise sales revenues rather than volumes

• market share– a low price can buy market share

• survival– but set prices too low and the firm will not

survive• image– price affects image

pricing objectives

• financial– make profit– maximise revenue– recover investment– survive

• marketing– build image• pile it high, sell it

cheap• prestige

– positioning– increase market share

pricing methods: market‐based

• customer value pricing• psychological price barriers• auctions• going-rate pricing• tenders• cartels

customer value pricing

• a product is only worth what someone will pay for it

• customers place a value on the product• companies set the price

when customer estimation of value = desired price= a fair deal for both parties

psychological price barriers

• based on the customer’s budget for the purchase– e.g. customer is prepared to pay up to £35 for a

return train ticket• price is set just below– e.g. £34.50

• requires accurate research

auctions

• traditionally sale rooms• currently popular on the Internet– e.g. eBay

• bids of increasing value until all but one buyer drop out

• can maximise price

going‐rate pricing

• based on competitors’ prices• advantages– can reduce price wars– can take advantage of others’ expertise

• disadvantages– assumes competitors have it right– assumes competitors have a similar cost base

price leaders (makers)

price followers (takers)

tenders

• numerous types– e.g. sealed bid

• lowest bid is awarded contract• favoured by governments and other public

sector organisations– for large orders and capital projects

cartels

• a group of competitors who collaborate to set prices– no real competition– e.g. OPEC (Organization of the Petroleum Exporting

Countries)• prices tend to be higher• considered an anti-competitive practice in many

countries– including the EU

pricing methods: cost-based

cost + profit = price

cost‐based pricing• cost plus pricing– mark-up pricing

• based on direct costs

– full-cost pricing• based on total costs

– contribution pricing• based on variable cost

• target profit pricing• based on breakeven point

pricing strategies

• new products– market penetration– market skimming

• general– prestige– pre-emptive– product line– price discrimination

new product pricing strategies

• market skimmingearly cash recovery

encourages new competitorsraises ethical issues

• market penetrationencourages product trialencourages retailers to build up stocks

may provoke competitive retaliationdelays cash recovery

ongoing pricing strategies• prestige

– premium price to match prestige image• pre-emptive

– low price to deter competition• product line

– different price points for a range of products• price discrimination

– same products but different prices for different market segments

pricing tactics

• psychological pricing– is £9.99 cheaper than £10?

• loss leaders– a bargain draws customers in

• promotional pricing and discounts– sales promotion

predatory pricing (destroyer or extinction)– illegal in the UK– an unrealistically low price to drive competition out of

the market

why change prices?

• a substantial change in business costs• an imbalance between supply and demand• a change in competitors’ marketing• a changed economic situation– e.g. inflation

• new laws, new taxes or other government pressure

• a change in the firm’s own marketing strategy– e.g. as part of a repositioning exercise

price elasticity of demand a measure of price sensitivityif the price goes up

but there’s a relatively small fall in sales

then demand for that product isprice inelastic, i.e. changes in price

do not affect the sales volume much

so, if you wanted to increase revenue,would you put the price up? Or down?

price elasticity of demand a measure of price sensitivity

if the price goes up

and sales fall dramatically

then demand for that product isprice elastic, i.e. changes in price

affect sales volume disproportionately

so, if you wanted to increase revenue,would you put the price up? Or down?

impact of price elasticity on sales

revenue• if demand is price inelastic– a higher price will result in a relatively small fall in

sales– the higher price should compensate– revenue should increase

• if demand is price elastic– a lower price will result in a relatively large rise in sales– the increased sales volume should compensate– revenue should increase

calculating price elasticity

price elasticity = percentage change in quantity demandedpercentage change in price

if the answer >1, then demand is elasticif the answer <1, then demand is inelastic(if there is a minus sign, ignore it)

summary

• without a price, a product is a gift• too high a price is unethical– and loses sales

• too low a price is generous– but loses profits

• prices can change over time– new strategy, new tactics– respond to changing market conditions

• price must fit within the marketing strategy– e.g. it is a key contributor to image