Friday, 11 October 2013

38 The Marketing Mix - Using pricing strategies to grow a busienss

10/10 Key terms on topic

  1. Competitive pricing - setting a price for a product based on prices charged by competitors.
  2. Price skimming - setting a price at a high level to create a high quality and exclusive image.
  3. Penetration pricing - setting a price at a low level to gain a greater market share.
  4. Cost plus pricing - setting a price by adding the agreed profit to the cost of producing a product or service.
  5. Loss leader pricing - selling the product at cost price (no profit) or at less than cost price (therefore making a loss) 
  6. Cost of Production - the total cost of fixed and variable costs involved with making a product and include rent for land or premises, machinery, labour (wages), raw materials etc
  7. Cost price - the unit cost price of selling one item
  8. Selling price - the selling price is the cost price plus profit and any taxes such as VAT that have to be added on.
  9. Market share - the sales of the product as a proportion of the market as a whole.  Which is best? A small market share in a fast growing market or a large market share in a slow growing market? 
  10. Competition - A model where many small firms compete in the supply of a single product. Profitable business will attract other businesses to enter the market.  Businesses compete on either price, quality, service or all three.   

These key terms will be assessed w/c 13th October 2013

Exam board specification and expectations

What pricing strategies are being used to sell the Blackberry Storm and the iphone 3Gs
Go to the website and find out:
www.vodaphone.co.uk/Storm and www.apple.com/uk/iphone

Developing Exam Skill. Compare and contrast or whats different or the same gets you to describe, identify, explain and analyse saying WHY and JUSTIFY prepares your ANALYSIS and sets you up well to EVALUATE  top tips here

What is it worth?What something is worth or how much you are prepared to pay for it is often within a range and if a retailer agrees with this they will probably make a sale.  When products first come on to the market they usually carry a PREMIUM as manufacturers wish to 'SKIM' or 'CREAM' the market.  Any new high tech product usually starts its life cycle in such a way and even when competitors enter the market realising that it is profitable the price remains high, especially in the run up to Christmas.  If a product is seen as a 'must have' the price could remain high for many months to come but at some point the price will start to fall and continue as it becomes less novel and less of a must have or luxury product.A Sat Nav once sold for £450 is today installed as an all inclusive extra in a modern car and included in the price. GPS devices are similarly installed for free in smart phones.  

Pricing Strategies for growth businesses use a number of strategies for to increase MARKET SHARE or to gain a foothold in a new market.  These include:
  • loss leaders - where a business deliberately prices a product at a LOSS (the price does not cover the cost). This will attract customers to the business and other strategies can be used to try to develop customer loyalty to try to keep their custom.
  • skimming - the product is sold at an initial high price to those customers ready to pay for it.  These products are usually 'cutting edge' technology.  once the initial demand is gone the prices are dropped and in some cases the product barely survives beyond the introductory phase as newer technology is brought out.
  • premium pricing - this is when prices are set at a high level to emphasise the quality of the product - designer clothes would be a good example.
  • penetration pricing - the price is set below competitor prices so that a business can gain a share of the market.  Sometimes customers are reluctant to change to competitors i.e. banks is an example of this.  This method of pricing is often short term and lasts only as long as it takes to for the business to gain a place in the market.   

How being bigger helps!A larger business is able to make short term losses on for example loss leaders or new products.  It can also afford to charge promotional prices on certain lines, paid for by the profits it makes on others

Did you know? Sometimes a product is made deliberately cheap you to buy other items to get full value. Can you think of some examples?  Although there are many different types of pricing they can almost all be called competitive pricing.  This is because in a market where there are businesses competing to sell rival products the price range of products of similar quality products is likely to be fairly narrow. 

Discussion Businesses with a larger market share may be able to price smaller competitors out of business.  These businesses would say that they were more efficient, so the customer is getting a better deal. Customers, however would think that they are being denied choice.  What do you think?

Web- based activity Find 8-10 products that are currently being launched.  'I Want One Of T'hose' at www.iwantoneofthose.com could be a good place to start.  Now look at the price of each of them.  Complete your table to show which price strategies are being used!

Pricing Strategies - questions you will need to answer in an exam...
  1. Name one pricing strategy that could be used for an expensive product
  2. Name one pricing strategy that could be used to enter a market
  3. Name one pricing strategy that is more likely to be available to a larger business than a small one.
  4. Outline what is meant by 'price range'
  5. Outline what is meant by 'cost plus' pricing
  6. What sort of products in general are launched with prices that skim the market?
  7. What is a loss leader? Why is it used?
  8. What is a premium price? Why is it used?
  9. What is a penetration price? Why is t used?
  10. Outline how market dominance is linked to price?
Worksheets

Nine mark questions
Seth’s music magazine
For years Seth Baxter has dreamed of setting up a new music magazine.  He has saved his own money and finally has investors who are willing to put money in to his company.  Seth has been a music journalist for many years and knows many artists and bands really well.  One of the unique features of his new magazine will be that musicians will write much of the material themselves.  He will also have CD’s and downloads that are exclusive to the magazine.  Seth has looked at the existing competition and is not yet sure what price to charge for his product.  Should he use penetration pricing or price skimming or something different? He is not sure how important the price is anyway – surely if the rest of the marketing mix is good enough the price is not important?
1.    What is meant by ‘price skimming’?                                                              (2 marks)
2.    Explain TWO factors that might influence the price that Seth charges for his magazine.                                                                                                   (5 marks)
3.       Do you agree that if the rest of the marketing mix is good enough the price of the magazine is not that important? Justify your answer.                                                                       (9 marks)
4.       Should Seth use ‘price skimming when he launches his new product? Explain your answer.
(9 marks)

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