Marketing Mix: Price - CCEA

Key facts about price and the marketing mix

Price: amount paid, influenced by costs, quality, brand, and demand.

Pricing strategies: skimming, cost-plus, penetration, competitor, promotional.

Demand: quantity bought at a price, generally rises as price falls.

Price-demand relationship: lower prices increase sales.

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.

What can influence a 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.

The demand and 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.

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.

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.

The five common methods of pricing are:

• Cost-based pricing

• Competitor-Based pricing

• Price Skimming

• Penetration pricing

• Promotional pricing

Now find out about price and demand.

Demand is the quantity of a product which will be bought at a given price.

A business will use data gathered by its computers and cash registers to track the relationship between the different prices it sets for a given product and how many are sold at that price.

The relationship between price and demand can be seen in the graph below:

A tools retailer sells builders’ leather gloves. They have sold them at different prices over time and they want to get a clearer idea of how many will sell if they raise the price from its current level of £6 per pair to £7.50 per pair.

Looking at the graph, we can see that in the past, there was the following relationship between price and demand:

• at £12 per pair, only 22,000 pairs were sold

• at £9 per pair, 30,000 pairs were sold

• at £6 per pair, 38,000 pairs were sold.

Price: Generally, it is a negative relationship: as the price falls, demand rises.

Customer tastes: as fashions change, so demand for certain clothing styles will change.

Level of income: if people are generally earning more money, demand for most products will tend to increase. This is particularly true for major purchases such as houses, cars and foreign holidays.

Price of other goods: some goods can be substitute products. For example, if crop failure led to a dramatic rise in the price of potatoes, a lot of people would eat pasta or rice instead.

Advertising: a successful advertising campaign can lead to an increase in demand for a product, even if price remains unchanged.

Credit rates: if it is cheaper to borrow money then more people will take out mortgages to buy houses, loans to buy cars and spend on credit cards to pay for consumer electronics / restaurant meals / holidays, so demand for these products and services increases.

What will affect the demand for paddle boards?

Final check: