Marketing Mix – Price
The price is the amount that consumers must pay for a product. Lower prices usually lead to higher sales volumes and vice versa.
Profit levels are not entirely linked to the number of sales however as a high profit mark-up on a lower sales volume can be more profitable than a low profit mark-up on a high sales volume.
Setting Price – Factors to Consider
- Prices being charged by competitors for similar products.
- How much it cost to make the product – so that costs are covered.
- The level of demand for the product – which may change over time.
- The desired profit margin eg third sector organisations may focus on covering costs over making profits.
- The stage of the product life cycle eg introduction, growth, maturity.
Cost-Plus Pricing
The organisation calculates the average cost of producing a unit of the product, then adds on a percentage ‘mark-up’ to get the selling price.
Example: Product A costs, on average, £10 to produce.
A producer who decides to mark up by 10% will sell for (£10 + £1) = £11.
Competitive Pricing
Rival businesses may decide to charge the same prices for the same products – for example, petrol, CDs and videos.
They do this to avoid a price war with their competitors. The business will aim to price match and then to compete on other elements of the marketing mix such as promotion.
Penetration Pricing (Low Pricing)
When introducing a new product, price is set low price to break into (penetrate) the market – eg new chocolate bars or a new brand of coffee.
This will aim to break customers’ brand loyalty to rival products. Once the new product is established, prices will be increased and newly brand loyal customers should continue to purchase.
Promotional Pricing (Low Pricing)
An established product reduces its prices for a short time to re-capture interest in the product and prevent it going into decline.
They may also do this if they have too much stock that may be about to perish or go out of fashion.
Destroyer Pricing (Low Pricing)
A large organisation may try to wipe out its competitors by reducing its prices to loss making levels.
Reserves of profit are needed as the organisation has to ‘out live’ the competitors it is trying to destroy.
Once competitors have been driven out of the market, prices can be increased again to a profit-making level.
Premium Pricing
Prices are set and kept at a high level at all stages of the product life cycle. This will maintain an exclusive image for the product.
This is associated with premium brands and must be linked to promotional activity to persuade customers that it is a superior quality product.
