The role of price in the marketing mix
When pricing a product, a business needs to choose one that fits with the rest of the elements in the marketing mix. E.g. high price so that consumers thinks they are buying high quality goods, low price for low quality goods, or competitive prices in a market with a lot of competition.
Price determination in a free market
People think that prices are determined by the seller of the product, but that is not quite so. Prices are driven by market forces called demand and supply.
Demand is not only that people want to buy a product, but that they want it can are willing to pay for it. Prices can affect how much demand there is for a product. Normally, if the price goes up, demand goes down, and vice versa. This can be shown on the graph below:
Supply also varies with price. However, it is different. If the price goes up, then the owners would want to be supplied with more products to take advantage of the high price, thus the supply goes up (and vice versa). This can be demonstrated on the graph below:
The market price
For the market price to be determined, demand and supply must all be put onto the same graph. The place where the two lines (called curves) cross is called the equilibrium, where the same number of goods are demanded and in supply resulting in no leftovers. All the products are demanded and all of them are sold.
Factors that affect demand and supply
The graphs above assume that the demand and supply of goods are fixed. But these things can change, which moves the demand or supply curve to the left or the right in the graph. Changes in the price affects where you are on the curves. But changes in other factors affect the position of the curve on the graph.
Factors affecting demand
- The popularity of substitute products. (products that can be used instead of the product)
- The popularity of complementary products. (products that require each other or are used together)
- Changes in income.
- Changes in taste and fashion.
- Changes in advertising.
The result is: if demand falls, the market price and sales will fall, and the demand curve will move to the left. If demand rises, the market price and sales will rise, and the demand curve will move to the right. It is illustrated on the graphs below.
Elasticity of demand
Elasticity of demand is how easily demand can change when prices change. A product with an elastic demand curve would have a higher change in demand than a change in price (uses percentages). A product with an inelastic demand curve would have a lower change in demand than a change in price. The elasticity of demand of a product is mainly affected by how many substitute products that it has.
Factors affecting supply
- Costs in supplying goods to the market:
- Price of raw materials.
- Wage rates.
- Improvements in technology:
- Makes it cheaper to produce goods.
- Taxes and subsidies:
- Higher taxes mean higher costs.
- Climate (for agricultural products):
- Supply of crops depend on weather.
The result is: if supply falls, the market price will rise, sales will fall and the supply curve will move to the left. If supply rises, the market price will fall, sales will rise and the demand curve will move to the right. It is illustrated on the graphs below.
Elasticity of supply
Elasticity of supply is how easily and quickly supply can change when prices change. How quickly means how quickly products can be produced and supplied, which is not very quick for products made by agriculture. A product with an elastic supply curve would have a higher % change in supply than a change in price. A product with an inelastic supply curve would have a lower change in supply than a change in price.
If a product is easily recognizable from other products, it would probably have a brand name. And if it has one, it would need a suitable pricing strategy to complement the brand name that should improve its brand image. Here are the strategies that are used:
Cost-plus pricing involves covering all costs and adding a percentage mark-up for profit.
- + Easy to apply.
- – You lose sales if your price is higher than your competitors price.
Penetration pricing is used to enter a new market. It should be lower than competitors’ prices.
- + Ensures that sales are made when a product enters a market.
- – Prices will be low. Sales revenue will be low.
High prices are used when a new product is introduced into a market, partly because it has a novelty factor, and because of the high development costs. High prices could be charged because a product is high quality. One last use of it is to improve the brand image of a product, since people usually associate high price with good products.
- + Skimming can help establish a product as being good quality.
- – It may lose potential customers because of high price.
Competitive pricing means setting your price to a similar or lower level than your competitors prices.
- + Sales will be high because your price is at a realistic level (not under/over-priced).
- – You have to research on your competitors prices which costs time and money. Promotional pricing
Promotional pricing means that you lower the prices of goods for a short time.
- + Help get rid of unwanted stock.
- + Can renew interest in a product.
- – Sales revenue will be lower. Psychological pricing
Psychological pricing involves setting the price that changes consumers perception of a product. This may be by:
- Using high price to make using the product give the user a status symbol.
- Pricing a product at just below a whole number (e.g. $99) which gives it an impression that it is cheaper.
- Supermarkets charge low prices for products that are bought on a daily basis to give consumers an impression that they are being given good value for money.