The Marketing Mix: Price
Why is the price of a product an important part of the marketing mix?
- Price is the amount of money producers are willing to sell or consumers are willing to buy the product for. The price element is very important to the marketing mix of a product.
- A product must be priced correctly else consumers will not be willing to buy said product. A product that is advertised to be luxurious and is sold in premium packaging cannot be sold for a low price as consumers may question the quality of the product.
- At the right price, businesses will be able to increase sales of their products and in turn, be able to increase market share. Furthermore, a business must also account for the prices competitors are charging to determine the price of their product.
- The right pricing strategy can have the intended effect on the customers. For example, pricing a high-quality product targeted at a high-income market segment can be priced high which may encourage customers to purchase it as a status symbol.
Pricing Strategies
Businesses employ different pricing strategies to attempt to maximize their sales. The strategy employed often changes based on the product being sold and the market in which it is being sold.
Cost-plus pricing
The cost-plus pricing is the cost of manufacturing the product plus a profit mark-up. This method is easy to apply, different profit mark-ups may be used and each product earns a profit for the business.
| Advantages | Limitations |
| Easy to apply Different mark-ups may be used Each unit earns a profit for the business | The selling price with the profit mark-up may be higher the competitors prices Expected profit will only be made if sufficient units are sold. There is no incentive to keep costs low |
Competitive Pricing
Competitive pricing is when the product is priced in line or just below competitors’ prices to try to capture more of the market.
| Advantages | Limitations |
| Sales are likely to be high Consumers would be willing to purchase the product compared to similar products | If a business’s cost of the product is higher than competitors then the business may make a loss Detailed research would need to be carried to determine the right price |
Penetration pricing
Penetration pricing is when the price is set lower than the competitors’ prices to be able to enter a new market.
| Advantages | Limitations |
| Market share will build up quickly Helps a new business establish itself in a new market. | Profit per unit may be very low Customers may not be comfortable with an increase in prices after the product is established in the market. Low prices may not be appropriate for a branded product. |
Price skimming
Price skimming is where a high price is set for a new product on the market.
| Advantages | Limitations |
| Skimming can establish the product being sold as of high quality. Research and development costs can be quickly recouped Profits will be high for new products before competitors enter the market | High prices may discourage certain customers from buying the product. High prices and profitability may encourage competitors to enter the market. |
Promotional pricing
Promotional pricing is when a product is sold at a very low price for a short period.
| Advantages | Limitations |
| Unwanted inventory can be gotten rid quickly. Helps keep a product at the maturity stage of its PLC. | Revenue per unit will be lower. This may cause competition to reduce prices as well. |
Dynamic Pricing
Dynamic pricing is when businesses change product prices, usually when selling online, depending on the level of demand.
Price Elasticity of Demand
Price Elastic demand is where consumers are very sensitive to changes in price.
Price inelastic demand is where consumers are not sensitive to changes in price.
To increase revenue, a business can decrease the price of a price-elastic product and increase the price of a price-inelastic product.
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