The Marketing Mix – Price
This chapter explains how businesses set prices, why price must fit the rest of the marketing mix, and how pricing choices can affect demand, revenue, market share and brand image.
Topic 1: Price and the Marketing Mix
Price is not chosen in isolation. It must support the product, place and promotion decisions.
1. Price in the Marketing Mix
The price chosen must fit with the other elements of the marketing mix:
- Product
- Place
- Promotion
For example, a high-quality luxury product with expensive packaging would normally have a relatively high price. A very low price could give customers the impression that it is poor quality.
2. Factors Affecting Pricing Decisions
When deciding what price to charge, a business should consider several important factors.
Costs
The price needs to help cover the costs of producing the product.
Competitors' Prices
If many similar products are available, customers may switch to competitors if the price is too high.
Business Objectives
The business may want to increase market share, increase profit or enter a new market.
Brand Image
A high-quality or luxury brand may need a higher price to support its image.
Topic 2: Main Pricing Methods
Students should know five main pricing methods and be able to apply them to business situations.
3. Main Pricing Methods
Students should know these five main pricing methods:
- Cost-plus pricing
- Competitive pricing
- Penetration pricing
- Price skimming
- Promotional pricing
4. Cost-Plus Pricing
Formula
Example
Total cost of producing 2,000 products = $2,000.
- Simple to calculate.
- Ensures a profit is included in the selling price.
- The resulting price may be higher than competitors' prices.
- Profit will only be earned if enough products are sold.
5. Competitive Pricing
It is particularly useful when there are many similar products in the market.
Example
A new washing powder may need to be priced close to competing brands because customers can easily switch.
- The product is less likely to appear overpriced.
- Can help the business remain competitive.
- A business with higher costs could make a low profit or even a loss.
- A high-quality product may need a higher price to maintain its quality image.
6. Penetration Pricing
Example
Competitors sell chocolate bars for $1.00, so a new business launches its bar for $0.80. The low price encourages customers to try the new product.
- Helps a new product enter the market.
- Can quickly increase sales and market share.
- Profit per product may be low.
- Customers may resist future price increases.
7. Price Skimming
It is often used for:
- new inventions
- technologically advanced products
- unique products with few competitors
Example
A new games console with much better technology may initially be sold at a high price because some customers are willing to pay more to own it first.
- High profits can help recover expensive research and development costs.
- A high price can create an image of high quality.
- The high price may discourage some customers.
- High profits may encourage competitors to enter the market.
8. Promotional Pricing
Examples
- temporary price reductions
- special sale prices
- buy one, get one free
- Can increase sales in the short term.
- Helps clear unwanted or old inventory.
- Lower prices reduce revenue per product.
- Competitors may respond by reducing their prices too.
9. Summary of Pricing Methods
| Pricing Method | Main Idea | Common Use |
|---|---|---|
| Cost-plus | Cost + profit mark-up | Cover costs and earn a target profit |
| Competitive | Similar to competitors | Competitive markets |
| Penetration | Low introductory price | Entering a new market |
| Price skimming | High introductory price | New or unique products |
| Promotional | Temporary low price | Increase short-term sales |
Topic 3: Pricing Perception and Demand
Some pricing decisions are designed to influence how customers think or to respond to changes in demand.
10. Psychological Pricing
Prices can affect how customers perceive a product.
High prices
A high price may make customers believe that the product is high quality, exclusive or a status symbol.
Prices just below a whole number
For example, $9.99 instead of $10 may make the product appear noticeably cheaper even though the difference is very small.
11. Dynamic Pricing
Examples
- airline tickets may be more expensive during school holidays
- tickets for popular events may become more expensive when demand is high
Dynamic pricing is often used for products and services sold online.
12. Choosing the Right Pricing Method
There is no one pricing method that is best for every product. The most suitable method depends on the circumstances.
| Situation | Possible Pricing Method | Reason |
|---|---|---|
| New and unique technological product | Price skimming | Customers may be willing to pay a high price because the product is new and different. |
| New product entering a highly competitive market | Penetration pricing | A low price can encourage customers to try it. |
| Product very similar to competitors | Competitive pricing | Customers can easily compare prices. |
| Business wants to cover costs and earn a set profit | Cost-plus pricing | A profit mark-up is added to the cost. |
| Old inventory needs to be sold quickly | Promotional pricing | Temporary discounts may encourage sales. |
Topic 4: Price Elasticity and Pricing Decisions
Students need to understand how sensitive customers are to price changes. PED calculations are not required in this chapter.
13. Price Elasticity of Demand
Price elasticity of demand considers how much demand changes when the price of a product changes.
Students need to distinguish between:
- price-elastic demand
- price-inelastic demand
14. Price-Elastic Demand
A small percentage increase in price causes a larger percentage fall in demand.
Example
Products are more likely to have elastic demand when there are many close substitutes and consumers can easily switch to competitors.
15. Price-Inelastic Demand
A percentage increase in price causes a smaller percentage fall in demand.
Example
Products with few close substitutes are more likely to have inelastic demand.
16. Elastic vs Inelastic Demand
| Price-Elastic Demand | Price-Inelastic Demand |
|---|---|
| Customers are very sensitive to price. | Customers are less sensitive to price. |
| Many substitutes may exist. | Few close substitutes may exist. |
| Price rise causes a relatively large fall in sales. | Price rise causes a relatively small fall in sales. |
| Increasing price may reduce revenue. | Increasing price may increase revenue. |
Topic 5: Revision Summary
Use these definitions and examination points for final revision.
Key Definitions
| Term | Meaning |
|---|---|
| Cost-plus pricing | Cost of producing a product plus a profit mark-up |
| Competitive pricing | Price set in line with or just below competitors |
| Penetration pricing | Low price used to enter a new market |
| Price skimming | High price charged when a new product is launched |
| Promotional pricing | Very low price charged for a short period |
| Dynamic pricing | Changing prices according to changes in demand |
| Price-elastic demand | Consumers are very sensitive to changes in price |
| Price-inelastic demand | Consumers are not very sensitive to changes in price |
What Students Must Know for the Examination
Students should be able to:
- explain why price must fit with the marketing mix
- identify important factors affecting pricing decisions
- explain and apply cost-plus, competitive, penetration, skimming and promotional pricing
- calculate a simple cost-plus price
- choose and justify a suitable pricing method for a business
- understand briefly how psychological and dynamic pricing work
- distinguish between price-elastic and price-inelastic demand
- explain how price elasticity can affect a business's pricing decisions
- understand that PED calculations are not required