Probably the single most important decision in marketing is of place, in that economists
will agree that price directly affects sales volumes. If a price is too high and the market
competitive, sales will fall.
On the other hand, many marketers have found ways to reduce the impact of price. In the
case of non-profit organisations there simply is no price (eg seeing a doctor) and as such
may not be applicable.
On the other hand, some principles can still be applied if ‘price’ is replaced by the
‘ perceived value’ to the customer. In this way the customers put a value (often a high
value) on the service, and this can be dealt with much as price is itself.
THEORY OF PRICING Much of the theory of pricing is derived from that of economics. The basic idea is that, ‘ Demand will be different at each price level chosen’ As can be seen from the diagram, demand normally (but not always) falls as price increases. Demand curve Price Quantity demanded
There are 3 major influences on pricing decisions. These are -
The quantity of products sold ( ie sales volume) is a critical factor in the success of any business. The reason is that every business has to pay 2 different kinds of costs associated with sales, fixed costs and variable costs .
Types of Costs
Fixed Costs – Are so called because they remain the same mo matter how many units of product are sold. (Such costs include; rent, rates, heating, lighting, wages, depreciation, insurance etc.)
Variable Costs – Are those that vary directly according to the number of units produced/sold. (Such costs include; materials and components, machine running time etc)
Market Penetration – This method offers low prices to attract large numbers of
customers and so gain market share by penetrating the existing market. The method
works best where demand is relatively elastic and increased sales can have a great
effect on reducing the unit cost per sale.
High fixed costs
Economies of scale
Lots of customers
Penetration pricing Leads to increased sales and market share A typical example would be a new breakfast cereal or a product launched in a new overseas market. Initially it would be launched with a relatively low price, coupled to discounts and special offers. As the product penetrates the market, sales and profitability increase. Prices can then creep upwards.