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http://www.bized.co.uk Pricing Policies, Quality and Adding Value BTEC Business Copyright 2007 – Biz/ed http://www.bized.co.uk Business Use of Demand Curves Firms can find analysis of their products’ demand curves useful as it helps them: • Work out how changing their prices will affect their revenue • Assess how consumers will react to changes in price Copyright 2007 – Biz/ed http://www.bized.co.uk Price and Demand • In general, the higher the price charged for a good or service, the lower the quantity that will be demanded of that product • This relationship is not necessarily simple • Let’s look at an example Copyright 2007 – Biz/ed http://www.bized.co.uk Demand Analysis Price 50 Quantity Total Demanded Revenue 1000 50000 100 800 80000 150 400 60000 200 300 60000 Copyright 2007 – Biz/ed http://www.bized.co.uk Demand Analysis • At £100 per unit, the firm earns £80000 revenue • If price rises to £150 per unit, revenue falls to £60000 • This helps the firm find its revenue maximising price Price Quantity Demanded Total Revenue 50 1000 50000 100 800 80000 150 400 60000 200 300 60000 Copyright 2007 – Biz/ed http://www.bized.co.uk Demand Analysis • At any price below £100 per unit, the firm earns more by raising its price • At prices over £100 per unit, the firm’s revenue falls • The revenue maximising price is at around £100 per unit Price Quantity Demanded Total Revenue 50 1000 50000 100 800 80000 150 400 60000 200 300 60000 Copyright 2007 – Biz/ed http://www.bized.co.uk Pricing Policies If a firm has the power in its market to set its own price, it can adopt a pricing policy: • Market penetration pricing • Destroyer pricing • Follow-the-leader pricing • Skimming Copyright 2007 – Biz/ed http://www.bized.co.uk Pricing Policies Find out more about these policies in your research time. ‘Premium’ pricing means charging higher prices to certain segments of their market. Copyright 2007 – Biz/ed http://www.bized.co.uk Adding Value This is where raw materials or component parts are processed to boost their value when they are sold on. Copyright 2007 – Biz/ed http://www.bized.co.uk Advertising Firms’ pricing policies can be made to work better through the use of advertising. Advertising is included under ‘Promotion’ as part of the Marketing Mix. Its aim is either • to inform consumers or • to persuade them to buy a particular product or range of products. Copyright 2007 – Biz/ed http://www.bized.co.uk Advertising • In oligopoly markets, advertising is often used to differentiate one firm’s products from those of its competitors • Firms adopting a market skimming policy use advertising to persuade consumers to demand their premium product Copyright 2007 – Biz/ed
