Download 3.3.2 Price

3.3.2 PRICE
Central Question
How do you decide
on your selling
price?
Factors to consider
•
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•
•
•
•
•
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Your costs
Your company objectives
The competition
Your product
The market
The state of the economy
The company or brand image
Your consumers / customers
Exchange rate?
Learning Outcomes
• To understand (benefits and limitations) and be able
to apply the following pricing methods:
- Cost Plus
- Competitive
- Penetration
- Skimming
- Promotional
• To be able to evaluate the most suitable pricing
strategy in a range of contexts
• To understand the significance of Price Elasticity –
whether a product is price elastic or inelastic – and
how this could impact a pricing decision
The Pricing Strategies
Strategy
Cost-plus
pricing
Description
Setting a price by adding a fixed amount or
percentage to the cost of making the product
Penetration Setting a very low price to gain as many sales as
pricing
possible
Price
Setting a high price before other competitors come
skimming into the market
Competitive Setting a price based on competitors prices
pricing
Promotional Offering a special price (discounted) or offer
Pricing
(BOGOF) to try and increase awareness or sales of a
product.
TASK –10 mins
• In pairs – research and identify one product which
utilises each pricing method.
• Be prepared to justify why they are using that
method and you will need evidence to support
your claims!
Feedback…
Consider These questions…
• If you increase your selling price, what is likely to
happen?
• If you decrease your selling price, what is likely to
happen?
• If supply of your product increased what might
happen to your selling price?
• If demand is high and supply is low what could you
do to your selling price?
• What is an ESSENTIAL product or service?
• What would happen if the selling price of this
essential product/service increased?
Price Elasticity
You ONLY need to know about the
concept and difference between inelastic
and elastic. Do not worry about graphs or
calculations. They are just for your
interest and further information if you
would like to know more!!
Elasticity – the concept
• The responsiveness of one variable to changes in
another
• When price rises what happens to demand?
• Demand falls
• BUT!
• How much does demand fall?
Elasticity – the concept
•
•
•
•
•
If price rises by 10% - what happens to demand?
Demand is likely to fall but….
By more than 10%?
By less than 10%?
Elasticity measures the extent to which demand will
change
Elasticity
• Price Elasticity of Demand
– The responsiveness of demand to changes in
price
– Where % change in demand is greater than %
change in price –
elastic
– Where % change in demand is less than % change
in price -
inelastic
Elasticity
The Formula:
Ped =
% Change in Quantity Demanded
___________________________
% Change in Price
If answer is between 0 and -1: the relationship is inelastic
If the answer is between -1 and infinity: the relationship is elastic
Note: PED has – sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand)
Research Task - 5 minutes
• Can you find 3 Price Inelastic goods or
services and 3 Price elastic goods or
services?
• Why would you categorise them like this?
Elasticity
Price (£)
The demand curve can be a
range of shapes each of which
is associated with a different
relationship between price and
the quantity demanded.
Quantity Demanded
Elasticity
Price
Total
revenue is of
price
x
The importance
elasticity
quantity sold. In this
is the information it
example,
TRthe
= £5
x 100,000
provides on
effect
on
=
£500,000.
total revenue of changes in
price.
This value is represented by
the grey shaded rectangle.
£5
Total Revenue
D
100
Quantity Demanded (000s)
Elasticity
Price
If the firm decides to
decrease price to (say) £3,
the degree of price
elasticity of the demand
curve would determine the
extent of the increase in
demand and the change
therefore in total revenue.
£5
£3
Total Revenue
D
100
140
Quantity Demanded (000s)
Elasticity
Price (£)
Producer decides to lower price to attract sales
% Δ Price = -50%
10
% Δ Quantity Demanded = +20%
Ped = -0.4 (Inelastic)
Total Revenue would fall
5
Not a good move!
D
5 6
Quantity Demanded
Elasticity
Price (£)
10
Producer decides to reduce price to increase sales
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ped = - 10 (Elastic)
Total Revenue rises
Good Move!
7
D
5
Quantity Demanded
20
Elasticity
• If demand is price
elastic:
• Increasing price
would reduce TR
(%Δ Qd > % Δ P)
• Reducing price
would increase TR
(%Δ Qd > % Δ P)
• If demand is price
inelastic:
• Increasing price
would increase TR
(%Δ Qd < % Δ P)
• Reducing price
would reduce TR
(%Δ Qd < % Δ P)
Reflection Time – Have we
met our objectives?
• To be aware of the costs and benefits of developing
new products
• To understand the concept of Brand Image and how
this can impact sales and customer loyalty
• To be able to appreciate the role of packaging in the
success or failure of a product
• To understand the stages of the Product Life Cycle
and possible extension strategies
• To understand how marketing strategies and
decisions can differ at each stage of the product life
cycle