Mkt Mix - Price

8/6/2019 Mkt Mix - Price

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BUSINESS STUDIESBUSINESS STUDIES

YEAR 11 A & BYEAR 11 A & BChapter 20Chapter 20 Marketing Mix:Marketing Mix:

PricePrice


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PricingPricing -- IntroductionIntroduction Setting the right price is an important part ofSetting the right price is an important part of

effective marketing . It is the only part of theeffective marketing . It is the only part of themarketing mix that generates revenue (product,marketing mix that generates revenue (product,promotion and place are all about marketingpromotion and place are all about marketingcosts).costs).

Price is also the marketing variable that can bePrice is also the marketing variable that can bechanged most quickly, perhaps in response to achanged most quickly, perhaps in response to acompetitor price change.competitor price change.

Put simply, price is the amount of money orPut simply, price is the amount of money orgoods for which a thing is bought or sold.goods for which a thing is bought or sold.

The price of a product may be seen as a financialThe price of a product may be seen as a financialexpression of the value of that product.expression of the value of that product.

For a consumer, price is the monetary expressionFor a consumer, price is the monetary expressionof the value to be enjoyed/benefits of purchasingof the value to be enjoyed/benefits of purchasinga product, as compared with other availablea product, as compared with other available

items.items.


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A customers motivation to purchase a product comes firstlyA customers motivation to purchase a product comes firstlyfrom a need and a want:from a need and a want: Example:Example:

Need: "I need to eatNeed: "I need to eat

Want: I would like to go out for a meal tonight")Want: I would like to go out for a meal tonight")

The second motivation comes from a perception of the value ofThe second motivation comes from a perception of the value ofa product in satisfying that need/want (e.g. "I really fancy aa product in satisfying that need/want (e.g. "I really fancy aMcDonalds").McDonalds").

The perception of the value of a product varies from customerThe perception of the value of a product varies from customerto customer, because perceptions of benefits and costs vary.to customer, because perceptions of benefits and costs vary.

In general, a products perceived value may be increased in oneIn general, a products perceived value may be increased in oneof two waysof two ways either by:either by:

(1) Increasing the benefits that the product will deliver, or,(1) Increasing the benefits that the product will deliver, or,(2) Reducing the cost.(2) Reducing the cost.

For consumers, the PRICE of a product is the most obviousFor consumers, the PRICE of a product is the most obviousindicator of costindicator of cost -- hence the need to get product pricinghence the need to get product pricingright.right.


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Role of Price in the Marketing MixRole of Price in the Marketing Mix

Must choose a price which fit in the rest of theMust choose a price which fit in the rest of themarketing mixmarketing mix

Example: High quality product aimed at the richExample: High quality product aimed at the rich

with exquisite packaging but low pricewith exquisite packaging but low price customers might not buy as they thought it is ofcustomers might not buy as they thought it is oflow qualitylow quality

If in a competitive marketIf in a competitive market prices are set quiteprices are set quite

similar to the competitorssimilar to the competitors

If in a unique marketIf in a unique market customers might becustomers might bewilling to buy at a high pricewilling to buy at a high price


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Price DeterminationPrice Determination Free MarketFree Market

If the products are similar (e.g. rice)If the products are similar (e.g. rice) prices will beprices will bedetermined by supply & demanddetermined by supply & demand

IfIf in competitors in competitors prices again will be determined byprices again will be determined by

supply & demandsupply & demand

businesses have to charge thebusinesses have to charge the MARKET PRICEMARKET PRICE for theirfor their

productsproducts


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Before we go ahead with pricing strategies we shouldBefore we go ahead with pricing strategies we should

be familiar withbe familiar with Price mechanismPrice mechanism..

Price of any product is influence by its demand andPrice of any product is influence by its demand and

supply.supply.

Law of demand: ifLaw of demand: ifPrice rises demand fallsPrice rises demand falls becausebecause

people will not be able to buy the same quantity ofpeople will not be able to buy the same quantity ofproduct with the same money they have.product with the same money they have.

Law of supply:Law of supply: price rises supply risesprice rises supply rises because morebecause more

and more suppliers will be willing to sell the productand more suppliers will be willing to sell the product

as there is more profit.as there is more profit. Price of the product in the market is determined atPrice of the product in the market is determined at

the price level where the demand equals the supply.the price level where the demand equals the supply.


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DemandDemand Demand is NOT just what people want to buy, theyDemand is NOT just what people want to buy, they

must also have the $$$ to purchase the productmust also have the $$$ to purchase the product

Demand depends on the prices charged.Demand depends on the prices charged.

If PIf P , Demand as fewer people will buy., Demand as fewer people will buy.

If P , Demand as more people will buy. Sales will If P , Demand as more people will buy. Sales will

See ExampleSee Example


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Price of Chocolate bar ($)Price of Chocolate bar ($) Qty Demanded of chocolateQty Demanded of chocolate

bars/ week (000s)bars/ week (000s)

2.502.50 1,0001,0002.252.25 2,0002,000

2.002.00 3,0003,000

1.751.75 4,0004,000

1.501.50 5,0005,000

1.251.25 6,0006,000

1.001.00 7,0007,000

When chocolate bar is @ $1.00, 7,000,000 chocolate bars

will be bought

If price to $2.00. only 3,000,000 will be bought


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De and c ve forchoc bar

0

0.5

1

1.5

2

2.5

3

1 2 3 4 5 6 7

Qty de anded/ week (0,000,000)

Price

($)

Demand Curve

As P , Demand for chocolate bars


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SupplySupply

Supply of a product also varies with priceSupply of a product also varies with price

As pricesAs prices , producer will want to sell/ supply more ( ) to, producer will want to sell/ supply more ( ) totake advantage of higher pricetake advantage of higher price

A supply curve will slope in the opposite direction of theA supply curve will slope in the opposite direction of the

demand curvedemand curve

ExampleExample


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Price of Chocolate bar ($)Price of Chocolate bar ($) Qty Supplied of chocolate bars/Qty Supplied of chocolate bars/

week (000s)week (000s)

2.502.50 7,0007,0002.252.25 6,0006,000

2.002.00 5,0005,000

1.751.75 4,0004,000

1.501.50 3,0003,000

1.251.25 2,0002,000

1.001.00 1,0001,000

When chocolate bar is @ $1.00, 1,000,000 chocolate bars

will be supplied

If price to $2.00. 5,000,000 will be bought


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Before we go ahead with pricing strategiesBefore we go ahead with pricing strategieswe should be familiar with Pricewe should be familiar with Pricemechanism.mechanism.

Price of any product is influence by itsPrice of any product is influence by itsdemand and supply.demand and supply.

Law of demand: ifLaw of demand: ifPrice rises demandPrice rises demandfallsfalls because people will not be able tobecause people will not be able tobuy the same quantity of product with thebuy the same quantity of product with thesame money they have.same money they have.

Law of supply:Law of supply: price rises supply risesprice rises supply risesbecause more and more suppliers will bebecause more and more suppliers will bewilling to sell the product as there is morewilling to sell the product as there is moreprofit.profit.


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Market PriceMarket Price

For the market price to be decided,For the market price to be decided,the supply curve and the demandthe supply curve and the demandcurve must be on the same graph.curve must be on the same graph.

Where the line intersect will be theWhere the line intersect will be themarket pricemarket price


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Factors that affect demandFactors that affect demand

s in the prices of other productss in the prices of other products

1.1. Substitute productsSubstitute products Used in place of another product. IfUsed in place of another product. IfP for substitute , more substitute product will be boughtP for substitute , more substitute product will be boughtand demand for original product will and demand for original product will

2.2. Products tend to be bought & consumed together. If oneProducts tend to be bought & consumed together. If oneproduct is bought less, the other demand will also product is bought less, the other demand will also

s in incomes in income

s in taste and fashions in taste and fashion

sin advertisingsin advertising


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Factors that affect supplyFactors that affect supply

s in the cost of supplying the product to the markets in the cost of supplying the product to the market If Ifexpensive, then supply will fallexpensive, then supply will fall

Improvement in technologyImprovement in technology

TaxesTaxes

Climate & weatherClimate & weather

DO ACTIVITY 20.2 Page 307DO ACTIVITY 20.2 Page 307


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Pricing StrategiesPricing Strategies Cost Plus PricingCost Plus Pricing

It involves estimating how many of the productIt involves estimating how many of the productwill be produced, then calculating the total cost ofwill be produced, then calculating the total cost ofproducing this output and finally adding aproducing this output and finally adding apercentage markpercentage mark--up for profit.up for profit.

(Total Cost/Output)* % mark(Total Cost/Output)* % mark--up=

Selling priceup=

Selling price

Penetration PricingPenetration Pricing

Involves setting the price lower than theInvolves setting the price lower than thecompetitors prices. This strategy is usuallycompetitors prices. This strategy is usually

followed where there is a lot of competition andfollowed where there is a lot of competition andthe product launched may not be unique.the product launched may not be unique.


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Price SkimmingPrice SkimmingThis is where the product is launched at a premium price. It isThis is where the product is launched at a premium price. It iscommon with products which are a new invention and peoplecommon with products which are a new invention and peopleare willing to pay a premium price because of the noveltyare willing to pay a premium price because of the noveltyfactors. It is quite common with Mobile phones and otherfactors. It is quite common with Mobile phones and other

technological products.technological products.

Competitive PricingCompetitive PricingIt involves setting the prices in line with the competitors priceIt involves setting the prices in line with the competitors priceor just below their prices.or just below their prices.

Promotional PricingPromotional PricingIt involves reducing the price of product for a limited period ofIt involves reducing the price of product for a limited period oftime. Summer sales are an example of Promotional pricing.time. Summer sales are an example of Promotional pricing.

PsychologicalPsychological PricingPricingParticular attention is paid to the effect that the price of aParticular attention is paid to the effect that the price of aproduct will have upon customers perception of the productproduct will have upon customers perception of the product


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Strategy Description

Cost-plus pricingSetting a price by adding a fixed amount or percentage

to the cost of making the product

Penetrationpricing Setting a very low price to gain as many sales as possible

Price skimmingSetting a high price before other competitors come into

the market

Predatory pricingSetting a very low price to knock out all the other

competition

Competitor pricing Setting a price based on competitors prices

Pricediscrimination

Setting different prices for the same good, but to

different markets e.g. peak and off peak mobilephone calls

Psychological

pricing

Setting a price just below a large number to make it

seem smaller e.g. 9.99 not 10


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A new business that is entering the market might try theA new business that is entering the market might try thefollowing strategies:following strategies:

If they are first into the market then they might use priceIf they are first into the market then they might use price

SKIMMING.SKIMMING. If they are trying to establish themselves in the market thenIf they are trying to establish themselves in the market then

PENETRATIONPENETRATION pricing.pricing.

Sometimes a business may use aSometimes a business may use a loss leaderloss leader. This is a product. This is a productwhere the price is so low that the retailer may not make anywhere the price is so low that the retailer may not make any

profit or even a loss on the sale, but does attract shoppers toprofit or even a loss on the sale, but does attract shoppers tobuy other full price products. Orange juice has been used bybuy other full price products. Orange juice has been used bybusinesses such as Rank Hovis McDougall to enticebusinesses such as Rank Hovis McDougall to enticesupermarkets to stock more of their other products.supermarkets to stock more of their other products.

Price skimming has been used for the launch of highPrice skimming has been used for the launch of hightechnology products, such as DVD players and Personal Digitaltechnology products, such as DVD players and Personal DigitalAssistants (PDAs)Assistants (PDAs) -- which were far more expensive thanwhich were far more expensive thanthey are now when they first arrived in the market.they are now when they first arrived in the market.


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ExerciseExercise

Do activity 20.3 page 311Do activity 20.3 page 311

Do activity 20.4 page 311Do activity 20.4 page 311

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Mkt Mix - Price

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