| Marketing mix The marketing mix is a combination of the 4Ps that a company uses to influence customers to purchase its goods or services. The 4Ps are:   |
Selling Price is what the business charges customers for its products. A price needs to cover all the costs for the business and an amount on top, called markup, this is profit.
The selling price of a Product will consist of an amount contributed to all the costs and markup on top for profit.
Remember for the exam:
Supply, Demand and Price Equilibrium
Imagine you own the only sweet shop within a 20-minute walk of the school. How much would you price your products for?
Supply and demand is an economic theory that can help businesses to price their products.
Supply is the amount of a product that a producer is willing to sell at a given price.
Demand is the amount of a product Consumers are willing to purchase at a given price.
Law of supply — as price increases, more suppliers will want to produce and supply more of the product at a higher price for a bigger reward.
Law of demand — as the price of goods increases, demand falls.
- This can be plotted on a graph as shown below:
Price equilibrium is the price point at which supply and demand meet and the quantity demanded is equal to the quantity supplied.
In this example, the price equilibrium is £2 with 200 units sold. The amount demanded by customers is 200 and the amount willing to be supplied by the business is 200.
If the price was higher, customers would be less likely to buy and supply would be higher, called a surplus. For example, if the selling price was £3, suppliers would only want to supply 300, but demand would only be 100. Meaning there is a surplus of 200 that would go unsold.
If the selling price was lower, there would be a shortage of the product as demand will be high but supply will be too low to provide enough.
Non-price determinants
Price is not the only factor that impacts supply and demand. There are also non-price determinants that can cause the supply and demand curve to move left or right.
Movement rules:
- Line shifts right ➡️ = increase in quantity.
- Line shifts left ⬅️ = decrease in quantity.
Try to remember, the lines do not move up & down, only left & right.
You will not be expected to draw a supply and demand diagram but will need to know its structure and how to interpret one.
Pricing Strategies
Dynamic Pricing
Advantages
- It can be used as a way to get more sales during quiet times
- Allows the business to maximize profits during busy times
- Prices better reflect supply and demand
- Extra revenue can be used to increase operational capacity. E.g. Uber claims to use surge pricing to encourage more drivers to come online
- Can be used to spread demand evenly across peak and off-peak times, e.g. electric companies offer a lower rate at night when the electric grid is not as busy
Disadvantages
- Customers may be put off when prices are higher and wait until the price is lower
- Customers may learn to cheat the system by purchasing during off-peak (quiet) times
- Customers may switch to competitors that don’t charge surge pricing, reducing loyalty
- Dynamic pricing can lead to price wars during less busy times with companies competing for customers
Cost-Plus Pricing
Advantages
- Easy to calculate
- Make a profit/ cover costs on every product
- Easy to increase the price if costs increase
- If all competitors in the same market use cost plus then the price may remain consistent if they have similar costs
- The price can easily be calculated with formulas
Disadvantages
- It is based on predicted costs therefore unexpected costs might occur
- Increase in production could increase costs
- Cost plus ignores Supply and Demand theory
- The business may not look to cut costs because they are charged straight to the customer
- Does not consider competitors pricing
Price Skimming
Advantages
- High price gives an impression of a luxury product
- Allows the business to take advantage of the popularity of the product
- High price can add to the perceived quality of the product
- Allows the firm to quickly get back costs such as from research and development
- High-profit margin for initial sales
Disadvantages
- Cannot be used in the long term as competitors will soon come into the marketplace or the product will become old or obsolete
- Can slow the growth of sales if the price is too high
- Retailers may want a large percent on luxury or premium products this can reduce the overall profits for the Manufacturer
Penetration pricing
Advantages
- Allows the business to quickly introduce its product to the market
- Initial high sales because the low prices mean the demand for the product is high
- Gives the business an advantage over competitors who may be using other pricing strategies
- The business may gain word-of-mouth recommendation because the product is priced low
Disadvantages
- The product may initially be sold at no profit (Break-even) or a loss while the business tried to attract sales
- Can affect the perceived quality of the product for example reduced and unpopular in the ‘bargain-bin’
- Customers may be put off if the prices eventually increased
- Not all products are suitable for penetration pricing, for example, luxury fashion
- Competitors may retaliate resulting in a price war
Loss Leader
Advantages
- Customer traffic will increase due to the low price
- Quantity limits may apple to the loss-making product
- Sales will increase as the product is worth more than the customer is paying for
- Quick to get the product into the customers’ houses because the product appears cheap at the time
- The business receives profit for a one-off loss
Disadvantages
- Risk of making a loss
- May backfire if the customers do not buy the profit-making product
- Customers may buy a new product each time rather than replenishing the consumable. For example, it’s often cheaper to buy a new printer than to replace the ink
Not all loss-leaders will have ongoing profit — some may just encourage one profit-making sale. For example, some Ryan Air flights may sell at no profit or a loss, with the expectation that customers will buy duty-free products or pay for upgrades, leg room or luggage. Another example is freemium software.
Competitive pricing
Advantages
- Allows the business to be on par with its competitors
- Customers may feel they are getting a good deal so sales may increase
- Good to sell off old stock
Disadvantages
- Can lead to a price war where retailers are constantly trying to better each other’s profits
- Lowering prices can lead to a reduction in profits
- Less revenue could mean the business has to make cuts elsewhere, such aa quality, which could in turn lead to a reduction in sales
- There are other areas a business can compete on such as quality, ease of use and Unique Selling Point (USP)
Promotional Pricing
Advantages
- Sales increase as customers like value for money
- Good to sell off old stock and increase sales in short term
- Raises brand awareness
- Customers may be interested in promotions may be susceptible to up-selling (selling them a more expensive/ higher profit product instead)
- Could result in increased market share
Disadvantages
- Promotions cost money and eat into the profit margin of the product
- Customers may become price sensitive and put off when the price returns to normal
- May influence brand image and customer perception of the product, for example, Gucci is rarely on sale whereas Lonsdale is
