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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:

Price and demand illustation

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 illustration

Loss Leader

Example: games consoles are usually sold for less than they cost to make. Huge profits are made on games and services

Cost Plus illustration

Cost Plus

Example: a store may buy stock for £10 per unit, and sell it for £15 — a 50% markup

Price skimming illustration

Price Skimming

Example: in 2017, the iPhone X cost £749. By 2019, the price had dropped to around £499.

Penetration Pricing illustration

Penetration Pricing

Example: a new coffee shop sells drinks cheaper than its rivals. As it becomes popular, prices will gradually rise.

Competitive Pricing illustration

Competitive Pricing

Example: in 2023 supermarkets, including Tesco and Sainsbury's, launched a promotion to match Aldi's prices on certain products.