The Marketing Mix: Price (DP IB Business Management)

The business calculates the cost of production and then adds a markup to determine the final price

The markup covers the cost of production plus the business's desired profit margin

This pricing strategy is commonly used by manufacturers that produce standardised goods e.g. washing machines

A simple and quick methods of calculating a price for a product

It ensures that a profit is made on each item sold

It does not consider the needs of the market 

The pricing approach of competitors is ignored

The business sets a low price for a new product/service when it is first introduced

This is effective when a business wants to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing

Once they have enough customers, the business will start to raise the price

Customers are attracted to buy the product at a low price leading to high sales volume and market share

Competitors unable to match or beat the low price may be forced out the market leading to less competition

Customers may perceive that the product is of low quality if the product is sold at a low price

Selling at a low price will limit the amount of profit made

Charging a price below the average cost for a product

The aim of this method is to attract customers to buy other profitable, products at the same time, making up for losses on the low-priced product

It is frequently used by large supermarkets that operate in competitive markets

This is an effective way to attract customers to switch brands

Losses may be minimised for businesses that have high levels of stock turnover for loss leader products

Smaller rivals may accuse businesses using this method of behaving unfairly

If customers do not purchase other goods the business will make a loss

The business sets prices so low that it drives its competitors out of the market

This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

This method allows a business to gain a dominant position in the market

It acts as a barrier to entry for firms considering selling in the market

Use of this strategy may have a negative impact on a businesses reputation

It is an expensive strategy for which a business needs sufficient finance to fund

The business sets a high price for its product which gives customers an impression of high quality and luxury

This is effective for designer brands such as Chanel and Ritz Carlton Hotels

The high price helps the business differentiate its products from competitors and make high levels of profit

Premium pricing should not be confused with price skimming, where a high price is set for a short period at a product's launch

This method emphasises  exclusivity and improves the value of a brand

Premium-priced goods often attract favourable attention from celebrities and the media, reducing the need for promotional activity

Large numbers of more price-conscious customers are ignored which limits sales revenue

Premium-priced products require high quality raw materials and components so variable production costs are usually high