Chapter 19

The marketing mix –

product and price
Introduction

Marketing is the management task that links the

business to the customers by identifying and
meeting the needs of customers profitably - it
does this by getting the right product at the right
price to the right place at the right time.
The marketing mix is the combination of
product, price, promotion and place that are
used to make inter-related and carefully
coordinated decisions regarding the marketing
of goods or services produced by a firm.
The marketing mix is often simplified and is
commonly described as the 4 P’s.
 The marketing mix -
It is a marketing tool that combines a
number of components in order to
strengthen and solidify a product’s
brand and to help sell the product or
service profitably.
 PRODUCT PRICE

PROMOTION PLACE
Product :
This includes the many different aspects of
a product such as design, quality and
reliability as well as its features and
functions.
A product is an item that is built or
produced to satisfy the needs of a certain
group of people. The product can be
intangible (a service) or tangible (a good).
Price :
This is what a business is asking
consumers to pay for a product or
service. The price can be related to
the cost of production or
sometimes related to the prices
charged by competitors.
Promotion :
This is the way a firm communicates information
about the product to the customer. It may use
advertising or sales teams to highlight its
strengths.
The promotion of a product will affect the image
that customer have of it and their awareness and
understanding of the benefits of the product.
Promotion includes advertising, special offers,
sponsorship and public relations activities.
Promotion :
Packaging is also part of promotion. Packaging
refers to the technology of enclosing or
protecting the product for distribution, storage,
sale and use.
Place :
This refers to the way the product is
distributed - is the product sold directly to
the customer or through retail outlets? Can
they buy it online or do they have to travel
some distance to get to a shop where it is
sold.
Place refers to the points of sale such as
store or websites as well as the vehicles
that distribute products.
The importance of each of these four
elements will vary depending on the
product being marketed.

However, while the significance of each

element may vary, it is absolutely vital
that all four elements fit together in a
coherent and carefully integrated
plan.
PRODUCT
What is meant by the term ‘product’?

Product can be goods or service.

Goods are tangible and are of two types:

 Consumer goods are goods which are ‘consumed’ by

people, such as chocolate, washing machines, cars.
 Producer goods are goods that are used by producers
or manufactures to produce further goods and
services such as a bottling plant, machinery and
trucks.
Services are intangible and are also of two
types

 Consumer services such as a haircut, car

repairs and education
 Producer services such as factory
insurance, advertising agencies and
transport
Tangible and intangible attributes
Customers have certain expectations of the
products they purchase that may not be easy to
quantify.
It is important that marketing managers try to
understand WHY people buy a product and what
intangible features or attributes of a product
affect their purchasing decisions.
For example why might they buy branded aspirin
rather than exactly the same, cheaper, but
unbranded, aspirin?
Meeting customers’ intangible expectations
for a product is most commonly achieved
by effective branding.

A brand is an identifiable symbol, name,

image or trademark that distinguishes a
product from its competitors.
Intangible attributes of a product refer
to the subjective opinions of customers
about a product that cannot be
measured or compared easily.

Tangible attributes of a product refers

to the measurable features of a
product that can be compared with
other products.
New product
development
New product development refers to three
categories of new products :

• Completely new and innovative ideas for

new products
• Products that are new to the company
• Products that are new for the market
(e.g. Ikea in Brunei)
Some businesses are able to adjust or adapt their
products and sell them over a long period – Coca
Cola, insurance – while other businesses in
rapidly changing industries will have to use new
product development (NPD) to keep up with
rapid changes – this applies especially to
technology.

New product development (NPD) refers to the

design, creation and marketing of new goods and
services.
Reasons why new product development is so important :
• Changing consumer tastes and preferences
• Increasing competition
• Technological advances
• New opportunities for growth – e.g. IKEA now also
offers kitchen design and installation as demand for
flatpack furniture slows
• Risk diversification
• Improved brand image – Toyota developed Lexus as
its ‘luxury’ vehicle which has improved the overall
image of the company
• Use of excess capacity
For a new product to succeed, it must:
• have desirable features that
consumers are prepared to pay for
• be sufficiently different from other
products to make it stand out and
offer a unique selling point (USP)
• be marketed effectively to
consumers, who need to be informed
about it.
For a new product to succeed, it must:

have desirable features that consumers are prepared to

pay for

be sufficiently different from other products to make it

stand out and offer a unique selling point (USP)

be marketed effectively to consumers, who need to be

informed about it.
A new product goes through a series of steps
before it reaches the market.
It all starts with an idea. The idea will be
researched by the marketing and operations
departments to verify whether it is likely to
satisfy consumers’ needs, and to determine the
feasibility of production.
Further market research will be conducted to
find out potential demand. If the marketing
department sees a potential market, a prototype
will be developed which is then tested in a
limited market.
Feedback is used to make any necessary changes
to the product so that it suits the market.

Once the product is finalised it will be launched

onto the main market.

New product development is expensive and is

not always successful.
 Product
differentiation and
unique selling
points
A unique selling point (USP) is a factor that
differentiates a product from its competitors,
such as the lowest cost, the highest quality or
the first-ever product of its kind.
A USP could be thought of as “what you have
that competitors don’t.”
Unique selling point
A successful USP promises a clear benefit
to consumers; it offers them something
that competitive products cannot or do not
offer; and it is compelling enough to attract
new customers.
The USP may be something unique to the
product, the distribution arrangements or
the marketing methods.
Examples of USPs include :
• Domino’s Pizza deliveries “it arrives
in 30 minutes or it’s free” promise.
 DeBeers - “A diamond is forever” - There is a
reason that the famous DeBeers slogan has
been in use since 1948 and is still used by the
company to this day.
The USP here is that diamonds, being almost
unbreakable, last forever and thus are the
perfect symbol for eternal love. As a result,
diamonds became by far the most popular
choice for engagement rings. It is no surprise
that Advertising Age magazine named this the
best slogan of the 20th century.
M&Ms
“The milk chocolate melts in your mouth,
not in your hand.”
This is an example of how even an unusual USP can
attract customer interest. Who would think of making a
selling point out of the fact that your product does not
melt when you hold it? M&Ms did, and it worked very
well for them. This goes to show that as long as a
benefit is meaningful to prospective customers, it will
be effective. In this case, the fact that the M&M candy
shell keeps the chocolate inside from oozing out and
dirtying your hands is a definite plus for customers.
Benefits of effective unique selling points

 The differentiating feature gives the firm a strong

promotional focus
 The business is able to charge high prices as a result
of the exclusive feature
 The USP should lead to increased sales and an
increase in market share
 Free publicity when the media reports on the USP
 It should leads to brand loyalty – a brand refers to an
identifying symbol, name or trade mark that
distinguishes a product from its competitors
Products and
brands
Products and brands

Product – a car – a general term describing

the nature of what is being sold.

Brand – Mercedes – the distinguishing

name, symbol, logo or image that
differentiates one manufacture’s product
from the others.
A product is the end result of the
production process that is sold on the
market to satisfy a customer need.

A brand is a product with unique

character, for instance in design or
image. It is consistent and well
recognised.
Brands
Branding is the creation of a recognisable
identity for a business that is attractive to
customers.
Branding can have a real influence on
marketing. It is about getting consumers to
choose one product over the competition,
as well as getting those consumers to see
your one product as the one that provides
a solution to their problems.
Aims of branding

The aims of branding are to :

• Make the business and its products stand out
• Develop emotional relationships with
consumers
• Establish customer loyalty
• Convince customers that they want to do
business with THIS firm
Branding :

• Is important for all businesses as it increases

value and gives employees direction and
motivation
• Makes getting new customers easier
• Creates trust among customers (with regards
to the quality of the product)
• Supports all other marketing activities
 Product
positioning
Product positioning
Product positioning refers to the consumer
perception of a product or service as compared
to its competitors.
A simple product positioning definition is
“where a product or service fits in the
marketplace”.
It outlines the features that make the
product unique and communicates how
and why it is better than other products or
solutions.
Product positioning is an important
element of a marketing plan.
The process of product positioning will identify
the features of each type of product that have
been shown by research to be important to
consumers. These key features might be price,
quality of materials, perceived image, level of
comfort offered (e.g. in hotels) and so on. They
will be different for each product category.
The product-positioning chart for Coke and
Pepsi uses gender and sugar levels to
compare brand perceptions. This chart
shows a possible gap in the market for a
medium calorie soft drink (aimed at
women?) although neither company looked
to fill this apparent gap.
An attempt at a mid-calorie cola resulted in
slow sales and both the Coke and Pepsi
versions where taken out of the ranges.
Gap – high calories
for female
consumers?
Product
portfolio
analysis
A product portfolio is the collection of all
the products or services offered by a
company.

Product portfolio analysis refers to

analysing a business’s existing range of
products and allows the business to
allocate resources between them.
Product portfolio analysis helps managers to
make decisions such as :
• When to launch a new product
• When to update an existing product
This can give a firm a competitive advantage.

The two product portfolio analytical techniques

are :
• The product life cycle analysis
• Boston Matrix analysis
Benefits of the product portfolio analysis
• Allows businesses to ensure that it always
has a product ready to replace products
that might be losing market share or sales
• It enables a business to have a range of
products so that if one fails the others can
provide revenue to cover
• It allows planning to take place over time
so that the business will always be in a
position to maintain revenue.
 Product
life cycle
Product life cycle
Understanding the product life cycle
will assist firms in deciding :
• when new products need to be added
to their portfolio,
• which of their products require
upgrading and
• when to withdraw a product from the
range.
Introduction Stage

 The product is launched into the market after

development and testing
 Sales usually grow slowly [Harry Potter and the
Deathly Hallows by J. K. Rowling sold nearly 15 million
copies worldwide in its first day.]
 Advertising is used to create awareness
 The firm will not earn a profit at this stage
 Price skimming may be used if the product is new
invention and has no competitors
 Competitive pricing may be used if it already has lot
of competitors
Growth Stage

 Sales grow rapidly if the product is well

received and has been effectively
promoted
 Persuasive advertising is likely to be used
 Prices may be reduced if the product
faces stiff competition
 The firm will start to earn profits
Maturity (or Saturation) Stage
• Sales may increase slowly or stop growing, but
they do not fall significantly either. They have
reach their highest sales figures – this results
from increasing competition, technological
changes, changing consumer tastes and/or
market saturation
• Competition is at the maximum level as many
new ‘me too’ products may be in the market but
no new competitors and the market is already
crowded with the same types of products
Maturity (or Saturation) Stage
• Promotional or competitive pricing might be
a good option
• Profits are at the highest level, possibly due
to economies of scale
• Repetitive advertising is done to remind
consumers about the product
• This stage can last for years e.g. Coca Cola or
Quaker Oats (launched in 1877) or can be
very brief e.g. fashion clothes
Examples of products in the saturation phase :

• smartphones - since so many people already have

smartphones, companies must create new demand
largely through continually upgrading their products.
There may not be much of a market for new
smartphone users, but existing users will often
purchase the latest version of their current device.

• consumer durables such as washing machines

Consumer durables are products that can be reused and
are expected to have a reasonably long life, such as
washing machines and fridges.
Producers may build in obsolescence in order
to avoid market saturation.

Planned obsolescence, or built-in

obsolescence, is a policy of planning or
designing a product with an artificially limited
useful life, so it will become obsolete after a
certain period of time.

The production of new versions of a product

will also make existing versions obsolete.
Decline Stage
• Sales start to decline
• Profits start to decline as well
• Marketing research it done to find out
whether this decline is permanent or
temporary - if the decline is permanent in
nature then the firm will halt production of
the product at some point - otherwise it can
implement extension strategies
• Advertising is reduced and then stopped
Extension strategies

Extension strategies are marketing

plans to extend the maturity stage of
the product before a brand new one is
released.
 The firm can introduce new variations of the
original product
 It may try to sell the product in different
markets, for example selling online
 A new advertising campaign could be used to
remind consumers about the product
 Add more retail outlets to boost sales
 Redesigning the product or the packaging to
improve its appeal to consumers may be
sufficient to extend the life of the product
 The firm could look for new uses for the
product
The impact of the product life cycle on
marketing decisions
The two main uses of the product life cycle
include :
• Assisting with planning marketing-mix
decisions such as new product launches and
price or promotion changes

• Achieving a balanced product portfolio

Assisting with planning the marketing mix
decisions

 When should the price of a product be

lowered?
 In which phase will advertising produce the
best results?
 When should variations of the product be
introduced?
Note that factors other than the life
cycle of the product will be taken into
account when making these kind of
decisions; for example competitors’
actions, the state of the economy and
the marketing objectives of the
business.
Identifying how cash flow might depend
on the product life cycle
The cash flow from a product as it moves
through its life cycle will change. Initially
high development costs and high
promotional costs will mean a negative
cash flow, but as the products moves
through the growth phase and into
maturity, the cash flow should start to
become positive.
The product life cycle and cash flow
Prior to the introduction of a product to the
market cash flow is negative as a result of the
costs of research and development.
Once the product is introduced to the market
and begins to sell it will start bringing in cash.
However profits will be low or negative at this
stage because costs such as research and
development have to be made up, production
costs have to be covered and marketing costs
will be high.
Prices may be set high on the product or
service (price skimming) to recoup some of
the development and introduction costs but
may also be low as a way to more quickly
build market share.
For example, microwave ovens that can now
be purchased for $50 were priced between
$2,000 and $3,000 when they were first
introduced.
As sales of the product start to grow the cash
flow improves.
During the maturity phase sales may increase slowly or
level off and promotion costs are likely to be low. Cash
flows during this phase will be at their highest.

When the product enters the decline phase, sales start

to fall and the firm may reduce prices – both of these
factors will contribute to falling cash flow from the
product.

When a product or service hits this stage, many

entrepreneurs reintroduce it with a new feature or
create a new benefit. Simply increasing the size of a
candy bar by 33 percent can re-start its life cycle.
Identifying the need for a balanced
product portfolio
If a business has too many products in low
cash flow stages of their life cycles
(introduction and decline) at the same time
then it will experience potentially serious
cash flow problems.
A balance product portfolio will protect the
firm from such problems.
A balanced portfolio will allow the
profits from some products to support
the cash deficits of others. It will also
allow factory capacity to remain
reasonably constant as new products
are brought on line while old products
are phased out.
Limitations of using the Product Life Cycle
Model for marketing decisions
The product life cycle model is by definition
simplistic. It is used to predict a likely shape
of sales growth for a typical product based
on past or current data.
Whilst there are many products whose sales
do indeed follow the classic shape of the life
cycle model, it is not inevitable that this will
happen.
For example, some products may enjoy a
rapid growth phase, but quickly move into
a decline phase if they are replaced by
superior products from competitors or
demand in the market overall declines
quickly.

Other products with particularly long life

cycles seem to enjoy a maturity phase that
lasts for many years.
Effective product planning requires the
use of a combination of tools including
the use of the Boston Matrix, sales
forecasts and management experience.
The Boston
Matrix
Boston Matrix – product portfolio
analysis
Owning a product portfolio is beneficial on
one hand but can also poses problems for
a business.
The business has to decide how to allocate
investment (e.g. in product development,
promotion) across the portfolio and the
Boston Matrix can be used to help to
resolve this issue.
The Boston
Matrix
Boston Matrix – product portfolio analysis
The Boston Matrix categorises a firm’s products
into one of four different areas, based on:
• Market share – does the product being sold
have a low or high market share?
• Market growth – are the numbers of
potential customers in the market growing or
not
The Boston Matrix is a method of analysing the
product portfolio of a business in terms of
market share and market growth.
How the Boston Matrix is Constructed?
The Boston Matrix makes a series of key
assumptions:
• Market share can be gained by investment in
marketing
• Market share gains will always generate cash
surpluses
• Cash surpluses will be generated when the
product is in the maturity stage of the life cycle
• The best opportunity to build a dominant
market position is during the growth phase
 How does the Boston Matrix work?
When products
are placed on the
BCG matrix, they
are often
indicated by a
circle. The size of
each circle
indicates the
relative
significance of the
product to the
business in terms
of the cash it
generates.
To use the chart, managers will plot a scatter
graph, ranking the business’s products on the
basis of their relative market shares and growth
rates.
This highlights the position of each product so
that the current product portfolio can be
analysed, and resources can be allocation. It
also points to possible future strategies and will
assist in decision-making about brand
marketing, product management and strategic
management.
The four categories can be described as
follows :
• Cash cows
• Stars
• Question marks
• Dogs
Cash cows are low-growth products with a
high market share.
These are mature, successful products
with relatively little need for investment.
They need to be managed for continued
profit - so that they continue to generate
the strong cash flows that the company
needs for its Stars.
Stars are high growth products competing
in markets where they are strong
compared with the competition.
Often Stars need heavy investment (e.g.
promotion) to sustain growth.
Eventually growth will slow and, assuming
they keep their market share, Stars will
become Cash Cows
Question marks are products with low
market share operating in high growth
markets. This suggests that they have
potential, but may need substantial
investment to grow market share at the
expense of larger competitors. Management
have to think hard about “Question Marks" -
which ones should they invest in? Which
ones should they allow to fail or shrink?
Dogs are products that have a low market
share in unattractive, low-growth markets.
Dogs may generate enough cash to break-
even, but they are rarely, if ever, worth
investing in. Dogs are usually sold or
closed.
The impact of the Boston Matrix analysis on
marketing decisions

The Boston Matrix can be used when :

• Analysing the performance and current position of

existing product portfolios

• Planning actions to be taken with existing products

• Planning the introduction of new products

There are four potential plans that managers can follow based on the results of the BCG
matrix analysis :

Building Holding Milking Divesting

Building
Increase investment (additional
advertising or more distribution outlets) in
a product to increase its market share.
For example, it is possible to push a
question mark into a star and, finally, a
cash cow.
Holding

Maintain the current position.

Star products will require continued support

to keep up their good market position. The
product may require a little ‘freshening’ to
hold consumers’ attention and retain high
sales growth.
Milking

Reduce investment in an established

product, e.g. a cash cow, and use the positive
cash flow from it to invest in other products.
Divesting

Release the money stuck in the business

by stopping production of the worst
performing products (dogs).

However the business must consider the

impact this will have on employees and
whether the resulting spare capacity can
be profitably used by another product.
A business needs products in every
quadrant of the BGC matrix (a balanced
portfolio) to keep a healthy cash flow and
have products that can contribute to the
future. If this is not the case then it may
not have enough cash to utilise these
plans.
Limitations of using the Boston Matrix for
marketing decisions
Note that no technique can guarantee success, but
it can help to achieve this.
• It is a useful tool for analysing the product
portfolio’s current performance and
position
• It allows plans to be formulated regarding
existing products
• It also allows for the planned introduction of
new products
However :
• the Boston Matrix is only a snapshot of the
current position
• It has little or no predictive value
• It is only a planning tool
• There are flaws in the assumption on which
the matrix is based, that profit is directly
related to market share – sales may be
gained by reducing prices and profit margins.
When you are answering a Boston Matrix
question, or using it as part of an argument in
relation to a broader question, you should
remember to use the terms associated with this
tool :
• Market share and market growth rate are
your parameters
• Investment refers to spending on promotion
• The various plans, or strategies, include
building, holding, milking and divesting
Summary
Product can be considered to be the key
element in the marketing mix. Without a
product that satisfies consumer wants there is
no marketing mix.
However without the right price, place and
promotion even a product that satisfies
consumer wants may not be successful. A
balanced marketing mix is crucial to overall
product success.
Price
Why is price a key part of the marketing
mix?

Price is the amount of money that your

customers have to pay in exchange for your
product or service.
Determining the right price for a product is
a significant marketing decision.
A common strategy for start-up businesses
is creating a bargain pricing impression by
pricing their product lower than their
competitors.

Although this may boost initial sales, low

price usually equates to low quality and
this may not be what customers to see in
the product.
The pricing level set for a product will :
• Determine the value added by the business
to the bought in components
• Influence the revenue and profit made by
the business through the impact price has
on demand
• Affect the psychological image and identity
of the product
• Reflect on the marketing objectives of the
business
Pricing decisions –
how do managers
determine the
right price?
There are many considerations that a business
will need to take into account before it decides
upon a selling price for a new product, such as:

Competitive
The cost of Competitors’
conditions in
production prices
the market

The objectives The stage in

Price elasticity
of the the life cycle
of demand
business of the product
The cost of production

If the business is to make a profit on the

sale of its products then the price it charges
must cover the costs of production (both
fixed and variable costs).
Competitive conditions in the market

The number of competitors in the industry will

affect the price level that the business decides
upon for its product(s).
If it is the market share leader it will probably
also be the price setter in that market.
If there are many competitors then the prices
charged by the firm may be similar to the other
business unless it is able to establish real product
differentiation.
Competitors’ prices

It may be difficult to set a price that is very

different from that of the market leader,
unless true product differentiation (see
above) can be established.
The objectives of the business
If the main objective of the business is to
maximise profit, then it is likely that the product
will be priced at a high level. If the firm aims to
establish a premium branded product then its
price will be set accordingly. Pricing strategy will
vary according to whether the firm occupies a
niche market or operates in a mass market.
However the price must tie in with the other
components of the marketing mix and be jointly
based on the objectives of the business.
Price elasticity of demand
Pricing levels will be related to the price elasticity of
demand of the products being produced.
The stage in the life cycle of the product
New product pricing will depend on whether a
skimming or penetration strategy has been decided
on. As the product grows and ages so pricing will be
altered accordingly.
The business image
If the image of the business is prestigious and up-
market, then a higher price is likely to be charged
for the product(s).
Pricing methods

There are many methods and strategies

that a business can use in order to arrive at
a selling price for its products. These are
categorised as :

 Cost-based methods
 Competition-based methods
Cost-based pricing
Firms will assess the cost of producing each unit
of the product and add a certain amount on top
of the calculated cost. This category includes :
• mark-up pricing
• cost-plus pricing
• full cost (or absorption-cost) pricing
• contribution-cost (or marginal-cost) pricing
• loss leaders
Mark-up pricing

Mark-up pricing means adding a fixed mark-

up for profit to the unit cost of a product.

This is where the business adds a profit mark-

up to the direct cost for each unit in order to
arrive at the selling price. This profit mark-up
will need to cover the fixed overheads and
then contribute towards profit. This method
is often used by retailers.
Cost-plus pricing

This is where the cost of producing

each unit is calculated, and then a
certain amount of profit mark up is
added to this unit cost to arrive at the
selling price.
Contribution-cost (or marginal-cost)
pricing
Contribution-cost pricing refers to
setting prices based on the variable
costs of making a product, and adding
a “contribution” amount which goes
towards covering fixed costs and
profits.
Contribution-cost (or marginal-cost) pricing
Product pricing starts with the variable costs
attributable to each product. An amount,
referred to as a contribution, is added to the
variable cost per unit to arrive at a price. The
contribution portion covers both fixed costs and
profits.
As long as a product is making a contribution
towards fixed costs it should continue to be
produced, given that there is spare capacity in
the firm.
Loss leaders
Loss leader pricing refers to products which are sold below cost
(at a loss), typically by retailers such as supermarkets, to attract
customers who might then buy other products.
Shoppers have a tendency of buying more than they had planned
but they need to be lured into a shop for this to happen. The
theory is that the loss on the loss leader will be more than made
up for by extra spending on the full-price items.
Some companies use a loss leading strategy when aiming to
penetrate new markets to gain market share.
Large companies can afford to price a product with no margin
because they have other products they can sell profitably to
make up for the loss. This strategy can obviously hurt small
businesses, who might be forced to drop their own prices.
Competition-based pricing

Competition-based pricing occurs

when a firm bases its price on the price
set by its competitors.
Competition-based pricing

Using this system of pricing a firm can :

 Set its price according to that used by the

market (price) leader
 Set a price which is similar to other firms in the
industry – this is often used where there are a
number of similar sized firms, and helps to
avoid a price war
Competition-based pricing
Using this system of pricing a firm can evaluate the
prices of similar products that are on the market.
Depending on whether the firm’s product has more
or less features than the competition, the company
will set its price higher or lower than the competitor
pricing.
For example, if this product has an extra feature
over the competitor’s product, the company could
either decide to price it the same, therefore making
it the better value or could price it slightly higher to
account for the additional feature.
Competition-based pricing includes :

 Price discrimination

 Dynamic pricing
Price discrimination
Price discrimination is practiced based on
the seller's belief that customers in certain
groups can be asked to pay more or less
based on certain demographics or on how
they value the product or service in
question.
Price discrimination is often used by airline
operators, as well as train and bus tickets.
Price discrimination refers to a business
charging different prices, in different markets or
to different consumers, for the same product or
service.

The basic objective of price discrimination is

that, by setting different prices for the same
product in different markets/segments, a
business can increase its total sales revenues.
Examples of price discrimination :

• Student and senior citizen discounts, off peak fares

cheaper than peak fares
• In the airline and hotel industries, spare seats and
rooms are sold at the last minute at greatly reduced
prices (price discrimination used to sell off spare
capacity)
• Reduced prices for cinemas and theatres in the
afternoons
Two things need to happen for a business to use price
discrimination :
There needs to be differences in price elasticity of
demand between the consumer groups which means
that the firm is then able to charge a higher price to the
group with a more price inelastic demand and a lower
price to the group with a more elastic demand.
For example, people who need to get to work in the
morning (inelastic demand) will be prepared to pay peak
fares for transport while people not on a fixed schedule
(shoppers? elastic demand) will be willing to wait until a
bit later in the morning when fares have dropped to off-
peak levels. (This spreads capacity utilisation.)
There also need to be barriers that limit consumers
switching from one supplier to another. For example, if
there is only one service provider (eg one bus service
in a town) then customers either use the bus or have
to switch to more expensive or less convenient
options, such as taxis or self-driving with the
associated problems of finding parking.
Peak and Off-Peak Pricing

Peak and off-peak pricing is common in some

industries. For example, telephone companies usually
separate markets by time - a daytime peak rate, an off
peak evening rate and a cheaper weekend rate.
Electricity suppliers in some countries also offer
cheaper off-peak electricity during the night. At off-
peak times there is spare capacity which consumers
are encouraged to take advantage of by the cheaper
rates. At peak times demand is high and there may be
capacity constraints.
Dynamic pricing

Dynamic pricing is a pricing strategy in which

businesses set flexible prices for products or
services based on current market demands.

The aim of dynamic pricing is to allow a business

that sells goods or services online and/or via
mobile apps to adjust selling prices on the fly in
response to changing market demand.
These "dynamic" pricing changes are done
automatically by software that gathers data and
uses algorithms to adjust pricing according to
business rules which take into account factors such
as :
• The customer's location
• Time of day
• Day of the week
• Level of demand
• Competitors' pricing
Pricing strategies for new products
Pricing strategies for new products can be split
into two different approaches :
• Penetration pricing
• Market (or price) skimming
Penetration pricing

Penetration pricing refers to setting a

relatively low price often supported by
strong promotion in order to achieve a high
volume of sales.
Penetration pricing
This is a pricing strategy designed to undercut
existing competitors, and to discourage potential
new rivals from entering the market.
The price of the product is set at a low level in
order to build up a large market share and a high
degree of brand loyalty.
The price may be raised over time, as the
product builds up a strong brand-loyalty.
Market skimming

Market skimming refers to setting a high

price for a new product when that product
is unique or highly differentiated with a low
price elasticity of demand (inelastic
demand).
Market skimming

This is a pricing strategy that aims to maximise

short-term profits before competitors enter the
market with a similar product.

The product is likely to have an inelastic PED

initially and profit should be maximised while
this is the case. In other words the business is
exploiting the profit potential of a unique good.
Market skimming

• PED is inelastic
• A % increase in price will lead to a smaller
% decrease in quantity demanded
• Managers can increase the price to
maximise profits. Note that if the price
continues to rise demand will become
more elastic
• Inelastic products have few substitutes
Market skimming

It is designed to create an up-market, expensive

image by setting the price at a very high level.
This image can be used to establish a strong
brand identity in the minds of consumers

It is a strategy often used for new, innovative or

high-tech products, or those which have high
production costs which need recouping quickly.
Psychological pricing
Psychological pricing refers, in one instance, to
the practise of setting a price at just below a
whole number, such as $1,999.99 making
customers feel they are paying much less than
$2,000.00, so they are more likely to buy than if
the price were set at $2,000.00.
Psychological pricing

A second aspect of psychological pricing refers to

setting prices which customers view as
appropriate (similar to perceived-value pricing).

A product which is seen to be priced too low may

be shunned because customers believe the price
reflects poor quality or the product lacks status
or exclusivity.
Pricing decisions – an evaluation

 A firm with a product portfolio will use

different pricing strategies for its different
products depending on costs of
production, market conditions such as
levels of competition and the stage of the
product in its life cycle.
Pricing decisions – an evaluation

 The price charged for a product can have

a very powerful influence on consumer
purchasing behaviour and it is important
that market research is used to
investigate how different price levels will
affect demand.
Pricing decisions – an evaluation
• Consumers expect good value when they buy
a product – this means that the marketing mix
has been well coordinated and has persuaded
them to accept the position of the product
and the price charged for it – they feel that
the product is worth what they paid for it.
“Good value” does not only relate to price, but
also to brand image or the lifestyle image offered
by the product.