Page 175 - Cambridge IGCSE Business Studies

12: Marketing mix: product and price

■ Loss-leader pricing is most often used by retailers, such as supermarkets. They off er

KEY TERMS
a few products well below the normal price, sometimes even at a loss. These prices
Loss-leader pricing: setting attract customers into the store who will also buy other products at their normal,
the price of a small number of profitable prices.
products at below cost to attract
■ Buy-one-get-one-free pricing is used to create product awareness and develop
customers into the outlet in the
customer and brand loyalty.
hope that they will buy other
products priced to earn profit. ■ Discounting the normal price is also used to create product awareness and build
up customer loyalty. Sometimes it is used by businesses wanting to sell off
Cost-plus pricing: setting price
by adding a fixed amount to the surplus stock.
cost of making or buying the
product. Cost-plus pricing
Cost-plus pricing is based on the cost of making the product or buying the product
for resale to the final consumer. There are two main methods of cost-plus pricing:

■ mark-up pricing
■ full-cost pricing.

Both methods are very similar. The price is set by adding a fixed amount – usually a

percentage – to the cost of making or buying the product.
EXAMPLE

Company X produces car batteries. The average cost of producing a battery is $8. They want to make a profit of 150% per unit sold.
The selling price of each battery will need to be:
Cost + 150% 173
$8 + (150% × $8) = $20

ACTIVITY 12.5

Paulo owns a local grocery store. He buys all of his goods from the local wholesaler. Paulo uses a mark-up of 30% on all
tinned fruit. He buys tins of fruit from the wholesaler for $0.40.
Calculate the price he charges in his grocery store for tinned fruit.

ACTIVITY 12.6

Work in pairs and discuss which method of pricing might be the most suitable for the following business situations:

1 The launch of a new chocolate bar by a leading manufacturer.
2 The launch of a new electric car in your country.
3 The opening of a new pizza takeaway in your nearest town or city.
4 The room rate for a new luxury hotel in your country’s capital city.
5 A local supermarket which has seen a recent fall in sales due to the opening of a new store by a major competitor.

A summary of the main features, uses, benefits and limitations of the pricing
methods is shown in Table 12.3, page 174.