What is the most expensive item of clothing you are wearing?
How much did you pay for it?
Could you have got a similar item for less money?
What convinced you to make the purchase?
Pricing & the marketing mix
The price of a product can have a major influence on its appeal and whether or not customers think its good value for money. There are many factors that influence the price of a product and different pricing strategies firms may use.
Getting the price right is an important element of effective marketing because it will determine whether customers believe they are recieving vaue for money.
You need to be aware of:
* The different pricing strategies that are used
* The different pricing tactics that are used
* The influences on pricing decisions
How price affects purchasing decisions
> If the price of a product is too high we simply cannot afford the product even if we want to!
> Even if we can afford a product we may decide it is not value for money if the price seems too high compared to the benefits the product offers.
> Just look at the market share budget airlines like Ryanair have gained at the expense of firms such as British Airways to see how price can influence demand.
Which garage would you stop at for petrol?
Would your decision be based on the same factors for an engagement ring?
What are the factors that influence the price of a product?
The type of product - some products are more price sensitive than others
The cost of producing a unit - although firms may sell at a loss to gain market share, in the long run a product will need to generate a proffit
The ability of customers to pay - the state of the economy may affect price sensitivity
The demand for a product - the level of interest and demand will effect price, for example the demand for outdoor heaters after the smoking ban
Competitors - if competitors are offering a similar product or service it is easy for customs to switch from one to another, firms are likely to set similar prices. This makes it especially important to stress the benefits of what your product offers
Pricing points - Some businesses aim to have a range of products at different pricing points in the market, e.g. VW with Audi, Seat and Skoda
The firm's objectives - a firm may have an objective to make a certain percentage profit or gain a higher maket share
The stage in the product life cycle - the price of a product is likely to be changed at different stages in its life cycle
The rest of the marketing mix - the price a firm charges depends on other elements of the marketing mix, e.g. a heavily branded product like Coca cola will be expensive compared to own brand products
What do you think?
A pricing strategy is a company's plan for setting its prices over the medium to long term. In other words it is not about deals such as 'This weeks special: 40% off!'
Short-term offers are known as tactics. Medium to long term plans are called strategies.
Price elasticity of demand
When a company increases the price of a product, it expects to lose some sales. Some customers will switch to a rival supplier; others may decide they do not want (or cannot afford) the product at all. Economists use the term 'the law of demand' to suggest that, almost invariably:
> When price goes up, demand goes down
> When price goes down, demand goes up
Price elasticity can be calculated using the following formula:
Price elasticity = % change in quantity demanded
% change in price
Price elasticity measures the extent to which demand for a product changes when its price is changed
Determinants of price elasticity
A second hand car dealer sells 60 cars each year. Currently he charges his customers £2,500 per car. This means the business has a total revenue of:
Total revenue = £2,500 X 60 = £150,000
From past experience the salesman believes the price elasticity of his cars is approximately 0.75. The dealer is thinking of increasing his prices to £3000 per car, an increase of 20%.
a) Calculate the anticipated % change in his revenue.
b) Calculate the new total revenue
c) Should the dealer change his pricing strategy? Justify your answer