IB Business Management 4.5 Price

Learning Outcomes To understand, apply and be able to select the most appropriate of the following pricing strategies: (A03) > Cost-plus (mark-up) > Penetration > Skimming > Psychological > Loss leader > Price discrimination > Price leadership > Predatory

Central Question How does a business decide what price to charge?

Pricing Price should be competitive & also profitable – Too high : can discourage customers – Too low : can portray poor image (cheap)

FACTORS AFFECTING PRICING DECISIONS

How much for a cup of coffee? What factors would a new coffee shop have to take into consideration when deciding how much to charge?

Factors Affecting Pricing Decisions Pricing Decisions Consumer research Costs Competitor prices Image creation Psychological factors

Pricing Strategies: > Cost-plus (mark-up) > Penetration > Skimming > Psychological > Loss leader > Price discrimination > Price leadership > Predatory

Cost-Plus Pricing (Mark-Up) Involves adding a percentage or fixed amount of profit to the average cost of production to determine the selling price Percentage or fixed amount added is called the mark-up or profit margin Selling Price = Average Cost + Mark-Up

Cost-Based Pricing (Mark-Up) Example A company makes mugs. The variable cost of producing each mug is $1.10. The factory currently has fixed costs of $10,000 per month and produces 20,000 mugs per month. a.What is the average cost of production? b. What would the selling price be if the company required a 50% profit margin? What would happen if production dropped to only 10,000 per month? What are the advantages and disadvantages of this pricing method?

Competition-based Pricing Strategies: Price Leadership Predatory Pricing

Competition-based Pricing Strategies Price Leadership Used by best-selling products or brands Few substitutes in consumers’ eyes Dominant product can set its own price while competitors follow the leader Going-Rate Pricing (HL) Refers to average rate charged by competitors in an industry

Competition-based Pricing Strategies Predatory Pricing Temporarily reducing price in an attempt to force rivals out of the industry Used when an existing firm is threatened with new competition

Predatory pricing?

MARKET-LED PRICING STRATEGIES

Market-led Pricing Based on customer demand and the prices that customers are prepared to pay for a product

Pricing Strategies Penetration Pricing Skimming Price Discrimination Loss Leader Psychological Pricing Pricing Strategies for New Products Pricing Strategies for any product

Penetration Pricing This strategy involves setting prices low initially to get customers interested The price will then be increased What are the risk of using this strategy? Customers may not be prepared to pay the higher price Can you think of any examples of products which use this strategy? Magazines, CD’s, Fizzy drinks

Skimming This strategy involves setting prices high initially then lowering prices later on. Customers who want the product before any one else will pay a high price When the price is lowered other customers will be prepared to buy the product Can you think of any examples? Mobile phones, Games Consoles

Price Discrimination Different prices are charged to different customers This can only be done if customers are not able to re-sell to each other

Loss Leaders A short-term pricing strategy whereby certain products are sold at below cost price The aim is that other full price products/complementary products will also be purchased

Psychological Pricing Prices are set at price points that have a psychological impact on customers

Which pricing strategies/tactics are being used here?

Which Pricing Strategies? Which pricing strategy/strategies would you suggest for these products…. Why?

Discuss: How might a firm’s pricing strategy change over time? Consider: The stage of the product life cycle Competition External environment Globalisation Ethics Technology/Innovation/Change Strategy

Price – CUEGIS? CONCEPTRELEVANCE TO PRICE THEORY CHANGE CULTURE ETHICS GLOBALISATION INNOVATION STRAETEGY

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