4.5b Price

Chapter 4.5 – The Seven Ps of the Marketing Mix

Focus: Price

1. Importance of Pricing in Marketing

• Pricing directly impacts sales, profitability, and competitiveness.

• Affects market share, brand perception, and customer demand.

• Businesses must balance costs, consumer expectations, and competitor prices.

2. Pricing Strategies

a) Cost-Plus (Mark-Up) Pricing

• Selling price = Cost per unit + Markup %.

• Ensures coverage of costs and desired profit.

• Example:
  Cost = $1, Markup = 200% → Selling price = $3.

• Advantage: Simple and predictable.

• Disadvantage: Ignores demand and competition.

b) Penetration Pricing

• Setting low initial prices to gain market share quickly.

• Prices increase once the customer base grows.

• Advantage: Builds brand loyalty and customer base.

• Disadvantage: Low profits in the short term.

c) Loss Leader Pricing

• Selling products at or below cost to attract customers.

• Profit comes from complementary or high-margin products.

• Common in supermarkets and online retail.

• Advantage: Increases overall sales volume.

• Disadvantage: Risk of losses if customers only buy discounted items.

d) Predatory Pricing

• Setting extremely low prices to drive competitors out.

• Often leads to price wars and legal scrutiny.

• Used when facing new market entrants.

• Advantage: Eliminates competition temporarily.

• Disadvantage: Unsustainable long term and may be illegal.

e) Premium Pricing

• Charging significantly higher prices due to quality or uniqueness.

• Builds a luxury brand image.

• Example: Rimowa suitcases start at USD $1,400 vs. similar products at $40.

• Advantage: Higher profit margins.

• Disadvantage: Limited to niche, high-income markets.

f) Dynamic Pricing (HL Only)

• Prices change based on demand and market conditions.

• Common in airlines, hotels, ride-hailing, and e-commerce.

• Higher prices during peak periods; lower during off-peak.

• Advantage: Maximizes revenue opportunities.

• Disadvantage: May upset customers due to frequent fluctuations.

g) Competitive Pricing (HL Only)

• Setting prices similar to competitors.

• Used when products are standardized and markets are saturated.

• Approaches:

  1. Above competitors – Premium positioning.

  2. Same as competitors – Market-neutral.

  3. Below competitors – Attracts price-sensitive buyers.

• Advantage: Keeps business relevant in competitive markets.

• Disadvantage: Limits differentiation opportunities.

h) Contribution Pricing (HL Only)

• Pricing based on direct production costs plus a desired contribution margin.

• Often used in break-even analysis.

• Helps determine profitability per unit sold.

• Advantage: Ensures cost coverage.

• Disadvantage: May overlook customer demand and competitor pricing.

i) Price Elasticity of Demand (PED) (HL Only)

• PED measures customer responsiveness to price changes.

• Formula:
  PED = (% Change in Quantity Demanded) ÷ (% Change in Price)

Types of Products:

• Price Elastic:

• Small price change → Large change in demand.

• Common for products with many substitutes.

• Lower prices can increase revenue.

• Price Inelastic:

• Price change → Small change in demand.

• Common for necessities or unique products.

• Higher prices can increase revenue.

Key Takeaways

• Choosing the right pricing strategy depends on market conditions, product type, and customer behavior.

• Businesses often combine multiple pricing strategies for better results.

• Understanding PED is essential for predicting the impact of price changes on revenue.