Chapter 12 - Marketing Mix, Product and Price
Lesson Objective: To understand the ins and outs of pricing your products/services
Pricing is an important decision for marketing: it directly impacts customers' purchase decision. It is also important because price dictates a business' revenues and profits.
On the topic of Price we will learn:
Pricing Methods: the strategies companies use to price their products differently;
How to pick the best Pricing Method based on the specifics of the company;
Price Elasticity of Demand.
One of the most common Pricing Strategies business implement is Price Skimming:
- Setting a high initial price;
- Targeted at the enthusiasts;
- Lowering price overtime to grab other segments of the market;
- Common for companies/brands offering unique products or with good reputation.
Example:
Another very common strategy is Penetration Pricing:
- The opposite of Market Skimming;
- Setting low prices at first;
- Focused on gaining customers at first;
- Increasing prices overtime to the same level as of competitors' prices;
- Used for companies entering a new market and trying to become popular.
Market Skimming vs. Penetration Pricing:
Competitive Pricing is when companies simply set their prices similarly to those of competitors'. Common pricing strategy to be used after Market Skimming or Penetration Pricing:
Note: It is also common for small firms to follow the prices of large companies. This is called Price Leadership.
Cost-Plus Pricing:
- When pricing decisions are based on the cost of producing/selling the product;
- It's a way to ensure profits and avoid pricing mistakes generating losses;
Promotional Pricing:
There are different types of promotions companies can run with their pricing:
Loss-Leader Pricing
Buy-One-Get-One-Free (BOGOF)
Discounting
All of which are limited in time and focused on quick increase in sales.
Loss-Leader Pricing: pricing some of your products cheaper to attract customers (e.g. supermarkets):
Buy-One-Get-One-Free (BOGOF):
Another promotional pricing aimed to:
- Create awareness;
- Develop loyalty;
- Encourage last-minute purchase decisions;
- Boost sales temporarily.
Discounting: widely used promotional priced to raise awareness as well as to sell-off stocks quickly:
As you can see, there are various different pricing methods companies can choose from. Which one is the best? How should companies go about selecting the most appropriate one?
There are some important variables managers can look into when making such decision:
- Is the product unique or widely available in the market?
- Is it an existing product or a completely new product?
- Is our market a very competitive one or are we competing with a few?
- Does the business have a strong brand image in the eyes of the customers?
- What are the costs of making and supplying the product?
It is also important to look within the business' said objectives, specially whether they are towards market share or profit maximization.
Activity 12.5 (p. 173)
Activity 12.6 (p. 173)
Do you agree that the price of a product will directly impact the demand for that product?
Usually, the higher the price, the lower the demand for a product/service. But that's not always the case.
To better understand how this works we should look at something called the Price Elasticity of Demand (PED):
What the PED shows us is how much the demand for a product will be impacted by a change in its price!
Let's look at examples to understand it:
Coke: price elastic demand - if the price increases the demand decreases;
Milk: price inelastic demand - price increases do not change the demand;
Spa: very inelastic demand - price increase results steep decrease in demand.
Price Elasticity of Demand can be visualized in graphs and calculated with a formula:
PED is a very important concept for businesses as they consider changing the price of their products:
As you can see, a change in price has a strong impact on the demand in certain situations. Such impacts can be summarized in this table:
To-Do List:
Exam Practice Questions (p. 178)
Chapter 12 - Marketing Mix, Product and Price
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