The marketing mix - OCRPrice

Price is the amount that must be paid to purchase a product or access a service. To be willing to pay the price, the customer needs to believe that there is enough value in the product or service. This can make setting a price quite tricky, because there are a number of things that will influence it.

Influences on price

The price of a product is how much a customer is asked to pay for it. When setting a price, a business needs to consider:

• The cost of making the product - price represents the revenue the business receives from selling each unit of its product. If the unit cost of the product is known, setting a price that is greater than the unit cost will ensure that the product is profitable, as long as consumers are willing to pay that price.
• The quality of the product - consumers expect to pay more for a high-quality product, as they understand that high-quality products usually cost more to make. Charging a higher price often gives the impression that a product is of a higher quality, even when it may not be.
• The brand image of the product - maintaining a brand image requires a high level of marketing activity and a consistent level of quality. These cost money, so a branded product often has a higher price than a non-branded product.
• Thedemandand supply of a product - if there is high demand for a product, consumers are likely to be willing to pay more for it. Therefore, businesses can charge a higher price for popular products, unless there are other businesses supplying similar products. If this is the case, they will need to consider their competitors’ prices.

Pricing strategies

When deciding what price to charge, businesses can choose between five common methods of pricing, known as pricing strategies:

Skimming

Price skimming involves charging a high price initially, and then lowering the price over time. It is used when a business has a unique product, for which some consumers are willing to pay a high initial price. For example, a new mobile phone handset is usually launched with a high initial price, with the price falling as competitors update and launch their latest models. This pricing strategy can only be used for a short-time period, whilst the product is unique.

Cost-plus pricing

Many businesses will consider their costs when setting their prices. Cost-plus pricing involves working out the cost per unit of producing a product, before adding a percentage for the profit they are looking to make. For example, if a business produces a product that costs £5.00 per unit to make, and they want to make a minimum profit of 40% then they would charge £7.00 per unit (£5.00 + 40% of £5.00).

Penetration pricing

In competitive markets, where there are many competitors, a business may decide to launch a product with a very low price, sometimes called a launch price, or introductory offer, in order to encourage consumers to try it. After the initial launch period, the price is then increased making this a short-term pricing strategy. It is called penetration pricing as it is designed to help a new product penetrate, or become known, within the market.

Competitor pricing

Competitor, or competitive pricing, involves setting prices based upon what competitors are charging for similar or identical products. Doing this means that a business can be confident that consumers are willing to pay the set price, but it usually means that the market is sensitive to changes in price.

Promotional pricing

Another short-term pricing policy, promotional pricing can be used as part of a promotional campaign, designed to increase sales, or as part of a sale that is designed to sell old stock in order to make way for new product ranges.