5.4c The Marketing Mix: Price
Covering Costs
A business must price its products / services so that it covers fixed costs and variable costs.
The business should aim to make a profit.
This means they sell goods and services for more they spend in total.
Fixed Costs
What is meant by "fixed costs"? Give examples.
Answer
Fixed costs do not change, regardless of the quantity of production (e.g., rent, salaries).
Variable Costs
What is meant by "variable costs"? Give examples.
Answer
Variable costs vary depending on quantity of production (e.g., raw materials, shipping).
Deciding Selling Price
Factors to consider
In addition to covering fixed and variable costs, a business must also consider:
- Competition - what prices are their competitors charging? Customers will shop where prices are cheapest.
- The nature of the market - if demand is high, businesses may be able to charge higher prices without significantly affecting sales. However, if demand is low, businesses may need to lower prices to encourage customers to make purchases.
- Product lifecycle - customers will be willing to pay more for a new and interesting product, but prices will need to drop when a product enters the decline phase.
- Business objectives - a business selling "premium" products, or wishing to maximise revenue will want to charge more than a business seeking to increase market share.
In most cases, raising prices will reduce demand.
A business must decide if higher prices will offset lower demand.
Prices low vs Prices high
Lowering Prices
A business may aim to keep prices low if:
- There is lots of competition
- The market is unwilling or unable to pay a higher amount
- They want to increase demand
- They wish to increase market share
- The product is in the introduction or decline phase of its lifespan
- Its fixed or variable costs decrease (perhaps due to scale of economies)
Raising Prices
A business may increase prices if:
- There's a lack of competition
- The market can sustain a price increase
- The product is in the maturity phase if its life cycle
- It is create a premium product
- Its fixed or variable costs increase
Pricing Strategies
Loss Leader
- A product sold at a loss, or very low profit margin.
- Aims to attract customers and encourage them to buy other, more profitable products.
- A marketing strategy that aims to increase sales and market share.
Example: games consoles are usually sold for less than they cost to make. Huge profits are made on games and services
Cost Plus
- Once costs have been covered, a markup amount (often a percentage) is added.
- A simple way to ensure a product is sold at a profitable price.
Example: a store may buy stock for £10 per unit, and sell it for £15 — a 50% markup
Price Skimming
- A product is launched with a high initial price to maximise revenue from early adopters.
- As competition increases, the price is reduced.
- An effective method for capturing market demand for unique or innovative products.
Example: in 2017, the iPhone X cost £749. By 2019, the price had dropped to around £499.
Penetration Pricing
- The opposite of price skimming.
- A product is launched with a low initial price to quickly gain market share.
- As the product becomes established, prices will rise.
Example: a new coffee shop sells drinks cheaper than its rivals. As it becomes popular, prices will gradually rise.
Competitive Pricing
- A product is sold at a similar price to competitors.
- Maintains market share and reduces incentive for customers to shop elsewhere.
- Careful monitoring of competitor's prices is needed.
Example: in 2023 supermarkets, including Tesco and Sainsbury's, launched a promotion to match Aldi's prices on certain products.