IB Business & Management: Unit 4.4:  Price <ul><li>Lesson 1:  </li></ul><ul><li>The Pricing Decision </li></ul><ul><li>(pp...
1. Think about it... <ul><li>“ What is a cynic? A man who knows the price of everything and the value of nothing.” - Oscar...
2. Focus Questions <ul><li>1. Who or what are the price makers and takers? </li></ul><ul><li>2. Describe and explain cost-...
3a. The Pricing Decision <ul><li>Deciding on the “right” price for a product is not an easy task. </li></ul><ul><li>Many p...
3b. The Pricing Decision: Price Makers & Price Takers <ul><li>Some firms are in a much better position to set prices than ...
4. Cost-Based Pricing Strategies <ul><li>These strategies are based on using costs of production to determine price. </li>...
5. Competition-Based Pricing Strategy <ul><li>Also referred to  competition-orientated pricing ; based on the prices being...
6a. Market-led Pricing Strategy <ul><li>This strategy relies on the actions of competitors. </li></ul><ul><li>based on the...
6b. Market-led Pricing Strategy <ul><li>Skimming Pricing : </li></ul><ul><ul><li>Price skimming is a strategy used for tec...
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BM 4.4 Price

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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

  1. 1. IB Business & Management: Unit 4.4: Price <ul><li>Lesson 1: </li></ul><ul><li>The Pricing Decision </li></ul><ul><li>(pp. 525-527,532,533-534, 552-555) </li></ul>
  2. 2. 1. Think about it... <ul><li>“ What is a cynic? A man who knows the price of everything and the value of nothing.” - Oscar Wilde (1854-1900), Irish author </li></ul><ul><li>What did Wilde mean by this quote? </li></ul><ul><li>Why is knowing or understanding the value of something more important than knowing its price? </li></ul><ul><ul><li>Why is this important in business? </li></ul></ul>
  3. 3. 2. Focus Questions <ul><li>1. Who or what are the price makers and takers? </li></ul><ul><li>2. Describe and explain cost-based pricing strategies. Why are they important? </li></ul><ul><li>3. What does it mean to have price leadership? </li></ul><ul><li>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? </li></ul>
  4. 4. 3a. The Pricing Decision <ul><li>Deciding on the “right” price for a product is not an easy task. </li></ul><ul><li>Many products fail due to poor pricing. </li></ul><ul><li>Setting prices too high will turn customers off your product. </li></ul><ul><li>Setting prices too low could create undesirable image for your company. </li></ul><ul><li>Pricing decisions will also impact sales revenue. </li></ul><ul><li>YOU as marketers need to have a clear understanding of this important link between PRICE and DEMAND for your PRODUCTS . </li></ul>
  5. 5. 3b. The Pricing Decision: Price Makers & Price Takers <ul><li>Some firms are in a much better position to set prices than other companies. </li></ul><ul><ul><li>The monopolist: single supplier of a product; has a high degree of market power and the ability to set its own price. </li></ul></ul><ul><ul><ul><li>Can you think of some monopoly type of companies? </li></ul></ul></ul><ul><ul><ul><ul><li>The monopolists can be price makers or price setters. </li></ul></ul></ul></ul><ul><ul><li>Firms that operate in highly competitive markets with easier barriers to entry, have very little control over setting the price. </li></ul></ul><ul><ul><ul><li>These firms are the price takers. </li></ul></ul></ul>
  6. 6. 4. Cost-Based Pricing Strategies <ul><li>These strategies are based on using costs of production to determine price. </li></ul><ul><ul><li>Cost-plus Pricing (mark-up pricing) </li></ul></ul><ul><ul><ul><li>involves adding a percentage (%) or predetermined amount of profit to the average cost of production to determine the selling price. </li></ul></ul></ul><ul><ul><ul><li>Both fixed and variable costs are included in this calculation. </li></ul></ul></ul><ul><ul><ul><li>The percentage (%) is called the mark-up or profit margin. </li></ul></ul></ul><ul><ul><ul><ul><li>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. </li></ul></ul></ul></ul><ul><li>This method is easy to use and calculate price, but does not focus on the needs of the customer. </li></ul><ul><li>A similar strategy is floor pricing used for economy brands. </li></ul><ul><ul><li>A very low price is set to appeal to price-sensitive customers. </li></ul></ul>
  7. 7. 5. Competition-Based Pricing Strategy <ul><li>Also referred to competition-orientated pricing ; based on the prices being charged by its competitors. </li></ul><ul><ul><li>Prices can be set equal to, lower than, or higher than those charged by other firms. </li></ul></ul><ul><ul><li>This strategy does not usually take into consideration the costs of production or the level of demand for the firm’s product. </li></ul></ul><ul><li>Price leadership : </li></ul><ul><ul><li>used for best-selling products or brands. </li></ul></ul><ul><ul><li>few substitutes in the eye of the customer. </li></ul></ul><ul><ul><li>competitors follow the leader by making their prices based on the prices set by the market leader. </li></ul></ul>
  8. 8. 6a. Market-led Pricing Strategy <ul><li>This strategy relies on the actions of competitors. </li></ul><ul><li>based on the level of customer demand or level of demand in the industry where the firm operates. </li></ul><ul><li>Penetration Pricing : </li></ul><ul><ul><li>is a strategy used for a new product to help establish itself in the industry. </li></ul></ul><ul><ul><li>this involves setting a low price in order to gain market share and brand awareness. </li></ul></ul><ul><ul><li>as the product establishes itself, prices can be raised. </li></ul></ul><ul><ul><li>this strategy is suitable for mass market products that sell in large volumes. </li></ul></ul><ul><ul><li>Highly suitable for products that have a high price elasticity of demand (p. 542). </li></ul></ul>
  9. 9. 6b. Market-led Pricing Strategy <ul><li>Skimming Pricing : </li></ul><ul><ul><li>Price skimming is a strategy used for technologically advanced and innovative products. </li></ul></ul><ul><ul><li>A high selling price is set to recoup the costs of research and development. </li></ul></ul><ul><ul><li>This strategy can create a unique, high quality or prestigious image for the products. </li></ul></ul><ul><ul><li>Few substitutes in the market, so can charge a high price. </li></ul></ul><ul><ul><li>Other competitors will want to enter this market due to the high profit margins. </li></ul></ul><ul><li>Prestige Pricing : </li></ul><ul><ul><li>involves a firm permanently setting a high price because of the image, reputation, or status linked with the product (designer clothes). </li></ul></ul><ul><ul><li>Price is not a major concern for these customers. :) </li></ul></ul>
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