1. Chapter 27 Blue book -Pricing Theories

2. What determines a price?
The cost of production
The market conditions
The competitor’s pricing
Marketing objectives
Price elasticity of demand
Whether it’s a a new or existing product

3. Types of pricing strategy
Explanation
1.Cost plus pricing
Adding a percentage mark up to the cost
2.Marginal cost price
Basing the price on the extra cost of making one additional unit of output
3.Contribution cost pricing
Setting prices based on the variable costs of production in order to make a contribution to fixed costs
4.Full cost/absorption
Setting a price by calculating the unit cost and then adding fixed mark up
5.Competition pricing
Bases prices on competitors prices
6.Predatory/destroyer pricing
Undercuts competitors prices to force them out of the market
7.Going rate
Based on market conditions and competitors prices

4. Market based pricing
Pricing strategies can be categorised into two broad categories
Penetration Pricing –setting prices low in order to achieve high sales –penetrate the market
Market Skimming –setting prices high for a new product to show it’s unique and differentiated, worth paying for.

5. Other types of pricing strategies
Price discrimination –different prices for the same product
Loss Leader –product sold at a very low price to encourage consumers to buy other products
Psychological pricing –setting prices that take into account customer’s perception of value of the product
Promotional pricing –special low prices to gain market share –buy one get one free

6. Prices are influence by Economics
Prices are determined by supply and demand
-If supply increases, then the price is likely to fall. If there are a lot of houses for sale, then the price will drop.
-If demand increases, then the price is likely to rise. If there are a lot of people wanting to buy houses compared to supply, the prices will rise.

7. PED
Price elasticity of demand refers to the measure of responsiveness of demand following a change in price.
The formula for PED is percentage change in quality demanded/percentage change in price
If the price of a textbook increases by 10% and demand therefore falls by 30%, then the PED is
30/10 = 3 –Demand is price elastic when the value is greater than 1

8. Income elasticity
Measures the responsiveness of demand for a product following a change in consumer’s incomes.
Products such as DVDs and airline travel have positive income elasticity, as income rises, demand for these products increase.
Necessity goods have low income elasticity, the demand for petrol is generally consistent regardless of incomes
Luxury goods have high income elasticity
Income elasticity is measure by percentage change in demand divided by the percentage change in income.

9. Cross Elasticity of Demand (XED)
Cross elasticity –measures the responsiveness of demand for a product following the change in the price of another product
Cross elasticity = percentage change in demand for product X/ percentage change in demand for product Y

10. Advertising Elasticity
-Measures the responsiveness of demand for a product following a change in the advertising spent on it
Advertising elasticity = percentage change in demand for product/percentage change in advertising spent on product

11. Activities Do Activity 27.1 page 285 Do Acitivity 27.2 page 286
Work on assessment task –Identify pricing strategies used by your brand