Pricing policies

Business will have different pricing policies depending upon what their objective are at the time . The business objectives may be:

Ø Maximizing profits

Ø Maximizing sales

Ø To increase market share though penetration pricing  i.e. , By selling at low price ( or when demand is elastic

Ø To skim or cream the market I.e. high price for a limited period of time to take advantage of unique nature of product before rivals enter ( or when the demand is inelastic

Ø To introduce a new product in the market

Ø To launch an existing product into a new market

Ø To destroy the market share of competitors by adopting a low price policy or prevent new firms from entering the market

Ø To position a product in the market. For example set a high price to project an “up market “image.

Factors affecting pricing decisions:

Costs: businesses relate price to cost. They first calculate fixed cost such as rent, interest repayments, and salaries. To this they add variable costs, which increase with the level of the output. In the long run a firm will continue in the business if it can cover its total costs. In the short run it needs to at least cover its variable costs if it’s still worth producing an output

Price sensitivity: A measure known as elasticity of demand is used to calculate the way in which the quantity demanded of a product will alter as price changes.

Some products are highly sensitive to price changes so that demand is said to be elastic Example: the demand for a product with many competitors such as a brand of washing powder is likely to be highly elastic

Customer’s perception of a price: If prices are too high customer’s might consider they are not getting value for money . If prices are too low they will begin to question the quality and value of a product.

Competition: the higher the competition and similarity of products in the market, the closer the price set to that of its competitor’s products.

Marketing Mix: the price chosen by a business must complement with the product, promotion and placement decisions.

Example: An economy product being sold in retail outlets with no promotion is likely to be sold at a low price.

Market segment: different product area aimed at different market segments by a business. The prices are different for different segments

Example: Different cars sold to different market segments depending on the income levels of customers

The stage of product life cycle: the price of a product is likely to be changed at different stages in product life cycle. For example, when the product is in the maturity stage, the price may need to be reduced avoid losing sales to competitors.