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BM 4.4 Price

BM 4.4 Price



B Business and Management (Standard Level)

B Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007



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    BM 4.4 Price BM 4.4 Price Presentation Transcript

    • IB Business & Management: Unit 4.4: Price
      • Lesson 1:
      • The Pricing Decision
      • (pp. 525-527,532,533-534, 552-555)
    • 1. Think about it...
      • “ What is a cynic? A man who knows the price of everything and the value of nothing.” - Oscar Wilde (1854-1900), Irish author
      • What did Wilde mean by this quote?
      • Why is knowing or understanding the value of something more important than knowing its price?
        • Why is this important in business?
    • 2. Focus Questions
      • 1. Who or what are the price makers and takers?
      • 2. Describe and explain cost-based pricing strategies. Why are they important?
      • 3. What does it mean to have price leadership?
      • 4. Is it advantageous for a company to conduct penetration pricing? What are some other market-led pricing strategies? Would you use these strategies? Why or why not?
    • 3a. The Pricing Decision
      • Deciding on the “right” price for a product is not an easy task.
      • Many products fail due to poor pricing.
      • Setting prices too high will turn customers off your product.
      • Setting prices too low could create undesirable image for your company.
      • Pricing decisions will also impact sales revenue.
      • YOU as marketers need to have a clear understanding of this important link between PRICE and DEMAND for your PRODUCTS .
    • 3b. The Pricing Decision: Price Makers & Price Takers
      • Some firms are in a much better position to set prices than other companies.
        • The monopolist: single supplier of a product; has a high degree of market power and the ability to set its own price.
          • Can you think of some monopoly type of companies?
            • The monopolists can be price makers or price setters.
        • Firms that operate in highly competitive markets with easier barriers to entry, have very little control over setting the price.
          • These firms are the price takers.
    • 4. Cost-Based Pricing Strategies
      • These strategies are based on using costs of production to determine price.
        • Cost-plus Pricing (mark-up pricing)
          • involves adding a percentage (%) or predetermined amount of profit to the average cost of production to determine the selling price.
          • Both fixed and variable costs are included in this calculation.
          • The percentage (%) is called the mark-up or profit margin.
            • For example, average cost of product A is $5.00 per unit, and you want a 60% profit margin, the price will be set at $8.00.
      • This method is easy to use and calculate price, but does not focus on the needs of the customer.
      • A similar strategy is floor pricing used for economy brands.
        • A very low price is set to appeal to price-sensitive customers.
    • 5. Competition-Based Pricing Strategy
      • Also referred to competition-orientated pricing ; based on the prices being charged by its competitors.
        • Prices can be set equal to, lower than, or higher than those charged by other firms.
        • This strategy does not usually take into consideration the costs of production or the level of demand for the firm’s product.
      • Price leadership :
        • used for best-selling products or brands.
        • few substitutes in the eye of the customer.
        • competitors follow the leader by making their prices based on the prices set by the market leader.
    • 6a. Market-led Pricing Strategy
      • This strategy relies on the actions of competitors.
      • based on the level of customer demand or level of demand in the industry where the firm operates.
      • Penetration Pricing :
        • is a strategy used for a new product to help establish itself in the industry.
        • this involves setting a low price in order to gain market share and brand awareness.
        • as the product establishes itself, prices can be raised.
        • this strategy is suitable for mass market products that sell in large volumes.
        • Highly suitable for products that have a high price elasticity of demand (p. 542).
    • 6b. Market-led Pricing Strategy
      • Skimming Pricing :
        • Price skimming is a strategy used for technologically advanced and innovative products.
        • A high selling price is set to recoup the costs of research and development.
        • This strategy can create a unique, high quality or prestigious image for the products.
        • Few substitutes in the market, so can charge a high price.
        • Other competitors will want to enter this market due to the high profit margins.
      • Prestige Pricing :
        • involves a firm permanently setting a high price because of the image, reputation, or status linked with the product (designer clothes).
        • Price is not a major concern for these customers. :)
    • End