What is Price?

• The money charged for a product or service

• Everything that a customer has to give up in order to acquire a product or service

• Usually expressed in terms of £

Some Possible Business Objectives that Will Influence Pricing

Financial Marketing

Maximise profitAchieve a target level of profitsAchieve a target rate of returnMaximise sales revenueImprove cash flow

Maintain/improve market shareBeat/prevent competitionIncrease sales Build a brand

Main Factors that Influence Pricing

Pricing DecisionsCosts

Elasticity of Demand

Product Life Cycle

Market Share Marketing

Objectives

Positioning

Competitors

Competitors Significantly Influence How Pricing is Set

Price takers Have no option but to charge the ruling market price

Price makers Able to fix their own price

Price leaders Market leaders whose price changes are followed by rivals

Price followers Follow the price-changing lead of the market leader

Price Skimming (1)

• Set a high price to maximise profit• Product is sold to different market segments

at different times• Top segment is skimmed off first with the

highest price• Objective– Maximise profit per unit to achieve quick recovery

of development costs

Price Skimming (2)

• Works well for products that create excitement amongst “early adopters”

• Best used in introduction or early growth stage of product life cycle

• Electronic items provide many great examples

Penetration Pricing (1)

• Opposite of price skimming• Offer a product at a low introductory price• Aim is to– Gain market share quickly– Build customer usage and loyalty– Build sales of higher-priced related items (“hook &

bait” approach• Price can be increased once target market share

is reached

Penetration Pricing: Examples of “Hook & Bait” Penetration Pricing

Sell Razor handles and inkjet printers at a low price to build customer usageSell consumable items (blades & cartridges) at a much higher price

• Price elastic demand means that a change in price will lead to a greater change in demand.

• Price inelastic means a change in price leads to a little or no change in demand.

Price elasticity of demand (PED)

PED can be calculated using the formula:– = PED

ExampleA newsagent sells 200 cans of Coca-Cola a week at a price of £0.50. The newsagent raises the price of the Coca-Cola to £0.60 and demand falls to 180 cans. What is the PED for this product?

Step 1 Change in Demand x 100 -20 x 100 = - 10%Original Demand 200

Step 2 Change in Price x 100 10 x 100 = 20%Original Price 50

Step 3 % change in Qd -10 = - 0.5% change in P 20

The answer is -0.5 as a 20% change in price has led to a less than proportional change in demand of just 10%. The cans are therefore said to be price inelastic.

You will not be asked to calculate the PED in the examination but an understanding of the formula helps to understand the concept and could be used to help gain application marks in the examination.

Price elasticity of demand (PED) Price elasticity of demand is a measure of how responsiveness demand is to a change

in price There is an inverse relationship between price and demand

As price goes up demand goes down As price goes down demand goes up

But the question is by how much? Is the change in demand more than proportional to the change in demand or less than proportional?

Price increases by 10%

Demand falls by

5%

PED is price inelastic as the fall in demand is less than the fall in price.

Price elasticity of demand (PED)

Price increases by 10%

Demand falls by

13%

PED is price elastic as the fall in demand is greater than the fall in price.

• Price elastic demand means that demand is sensitive to price changes

• Price inelastic demand means that demand is not so sensitive to changes in price

Can you think of products that are likely to be highly price elastic and some that are likely to be highly price inelastic?

How price inelastic can a cheese sandwich really be?