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Marketing Mix: Price
Study
Penetration Pricing
Products are initially sold at a low price to break into the market and gain market share. Once a firm has enough market share, it can raise its prices.
Advantages of Penetration Pricing
Suitable for mass market products sold in large volumes, New firms trying to enter established markets, Price advantages gained
Disadvantages of Penetration Pricing
If price are too low, can cause customers to perceive it as inferior/low quality, No suitable for long term, If external costs rise = no longer profitable
Cost-plus (mark-up pricing)
Finding out average cost per unit + % markup
Advantages of Cost-Plus Pricing
Easy to calculate, Price covers costs, Suitable for any business, Suitable for when costs are rising, Suitable for when demand is high
Disadvantages of Cost-Plus Pricing
Does not consider needs of customers, Ignores prices being charged by competitors, Few incentives to reduce costs, Does not focus on demand
Loss Leader
Selling a product below its cost value to attract customers to the store and recoup loss by selling complementary products.
What are the advantages of using a loss leader pricing strategy?
Suitable for low-cost products, Incentivizes customers to switch brands, Attracts customers, Benefits from higher sales revenue, Quick and effective way to clear out stock.
What are the disadvantages of using a loss leader pricing strategy?
Customers might expect the business to continue offering loss leader products, Expensive to sustain, No guarantee that customers will buy other products, Can be regarded as anti-competitive and deemed unethical.
Predatory Pricing
Temporarily reducing prices with the intention of forcing a competitor out of a market, typically used when an existing firm is threatened with new competition.
What are the advantages of using predatory pricing?
Encourages customers to buy more, can be a barrier to entry for competition, and can inflict losses on competitors.
What are the disadvantages of using predatory pricing?
It is anti-competitive, customers might doubt the quality of the product because of the low price, and it is likely to cause competition to reduce their prices in retaliation.
Premium Pricing
The price of the product is set significantly higher than similar competing products, usually because the product is of higher quality or is unique enough to justify the premium price.
Advantages of Premium Pricing
- Generates higher profit margins - Higher barrier to entry for competitors
Disadvantages of Premium Pricing
- Limits customer base due to a relatively high price - May lose status if they appeal to the mass market - Requires strong brand loyalty, which is expensive to establish and maintain
Dynamic Pricing
Changing the price of a good or service to reflect the changing market demand.
Advantages of Dynamic Pricing
Helps maximize profits, Motivates businesses to provide better service, High price = high demand/low supply, Encourages service providers to provide more/better service, Allows customers to have more choice
Disadvantages of Dynamic Pricing
Customers may feel unhappy, Associated with being unethical, Prices become inflated at high demand times, Can lead to price wars and predatory pricing, Time-consuming for customers to find the best price, High cost for businesses in analyzing data
Competitive Pricing
When a firm sets the price of its goods or services at the same or similar level to its competitors. Used when a product has been on the market for a while, When there are many substitutes available
Methods of Competitive Pricing
Pricing above the competition, Pricing same as the competition, Pricing below the competition
Disadvantages of Competitive Pricing
Needs constant monitoring, May lead to price wars, Can reduce profit margins
Advantages of Competitive Pricing
Simplistic and easy to calculate, Low-risk strategy, Flexibility
What is Contribution Pricing?
Involves setting a price based on the fixed costs of producing a product.
What are the advantages of Contribution Pricing?
Ensures selling price is high enough to cover both direct and indirect costs, enables determination of products generating the highest and least amount of total contribution, Easy to calculate, Know what to charge customers for a special or additional order.
Disadvantages to Contribution Pricing
Indirect costs allocation can be subjective when dividing them among various products. Assumes the product's selling price remains consistent (due to economies of scale). Even if the selling price is stable, it's crucial for a business to monitor the prices set by its nearest competitors. Contribution pricing and analysis presume that manufacturers produce and sell the same number of units.
What is the difference between Contribution Pricing and Cost-plus Pricing?
Cost-plus includes all costs (fixed + variable) and then adds markup, while Contribution Pricing only includes fixed costs.
Marketing Mix: Promotion
Study
What are the objectives of promotion?
Persuasion, Inform, Differentiation, Devotion
What is Above the Line (ATL) promotion?
Paid-for promotion through mass media sources
What is Below the Line (BTL) promotion?
Non-mass media promotional activities with direct control
Give examples of Below the Line (BTL) promotion methods.
Sales rep, in-person meetings, door-to-door salespeople
What is Through the Line (TTL) promotion?
Involves both ATL and BTL
What are the advantages of Television Advertising (ATL)?
Can be targeted to specific audiences
What are the disadvantages of Television Advertising (ATL)?
Huge cost of production and advertising for a short time slot
What is the advantage of Personal Selling (BTL)?
Improves customer satisfaction, builds trust, and builds brand awareness
What are the disadvantages of Personal Selling (BTL)?
Labor-intensive, relatively expensive, salesperson training is time-consuming and expensive
Name some examples of Direct Marketing (BTL).
Telemarketing, Email advertising, Direct mail by post
What are the advantages of Direct Marketing (BTL)?
Can be targeted towards specific demographics, can be personalized, affordable for SMEs
What are the disadvantages of Direct Marketing (BTL)?
Intrusive, low response rates, resource and financially expensive
Give examples of Sales Promotions (BTL).
Buy one get one free, Discount vouchers, Free samples, Competitions for prizes
What are the advantages of Sales Promotions (BTL)?
Clear excess inventory, improves customer involvement and loyalty, improves the company’s public image
What are the disadvantages of Sales Promotions (BTL)?
Increased sensitivity to price, short-term solution, limits revenue
Give examples of Point of Sales Promotion (POS) (BTL).
Supermarkets, Convenience store
