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12: Marketing mix: product and price
Choosing a pricing method
TOP TIP How do businesses decide on the price of their products? When setting the price of
It is important to know when a a product businesses need to answer these questions:
business can use each pricing
strategy. Not all strategies will
be appropriate for all market ■ Is it a new or existing product? When a product is new to the market it might be
situations. Look at the context priced lower than a product in the growth or maturity stage. This is so it can gain
of the question before you sales and develop customer loyalty to the product. When a product enters the
decide which strategy is most decline stage its price might be lowered to sell off the last remaining inventory.
appropriate.
■ Is the product unique? A skimming strategy – charging a very high price – might be
used for a product that has no close substitutes. For example, the latest model of
iPhone or iPad is often launched onto the market at a very high price. Once similar
products enter the market, the competition will cause prices to fall.
■ Is there a lot of competition in the market? Very competitive markets will result in
most firms charging very similar prices for their products as consumers will buy the
least expensive if there is little to choose between them.
■ Does the business have a well-known brand image? Companies such as Sony
and Cadbury are able to charge a higher price for their products even though
competitors have similar products on the market. This is because consumers
trust the brand and consider the products to be of a better quality than cheaper
alternatives.
■ What are the costs of making and supplying the product? Clearly, the price has to
be greater than the cost of making and marketing the product so that the business
can earn profit.
■ What are the marketing objectives of the business? If the business wants to 175
increase market share by volume of sales then it might charge a lower price than
competitors. However, if the objective is to maximise profit, then they might have a
different pricing strategy.
Price elasticity of demand
What would you do if the price of a cinema ticket increased by 10%? You might still
go to the cinema but not as oft en.
Suppose the only safe drinking water in your country has to be bought in
bottles. What would you do if the price of bottled water increased by 10%?
You need water to survive so you will probably continue to buy bottled water,
although you might try to reduce how much by taking greater care over how
you use it.
KEY TERM In both of these cases the demand for the goods or service will fall as a result
of an increase in their price. However, the demand for cinema tickets will almost
Demand: the quantity of goods certainly fall by a greater amount than the demand for bottled water.
and services consumers are
The opposite would also be true. If the price of cinema tickets decreased by 10%
willing and able to buy.
you would probably go to the cinema more often. However if the price of bottled
water fell by 10% you would not buy very much more because you are probably
buying enough already. In both cases the demand will rise as a result of a decrease
in price.
