Price A Low Price: undercuts the competition, makes it possible to sell large quantities at a low cost per unit. However this may mean that there isless revenue made per unit sold and furthermore customers may viewthe product as low quality. An average price: you will need to compete with your rivals. A higher price: Products can be set at a higher price if they include new and unique technologies as other competitor’s products are unable tocompete. Moreover, prestige brands such as Louis Vuitton and Rolex areable to set ‘prestige pricing’ as there products are viewed as extremelyhigh quality. Price elasticity of demand – a measure of responsiveness of demand to a change in price. ❖ Measures how much the quantity demanded changes following achange in price ❖ E.g. Aaron sells fruit and vegetables one week and lowered theprice of his mangos by 5%- the demand increased by 20%.Demand for his mangoes are elastic. ❖ E.g Aaron decides to raise his price by 5%, sales of his orangesonly dropped by 2%. Demands for his oranges are inelastic. ❖ *Knowledge of elasticity of demand helps sellers decide how muchto charge for a product, whether sales will increase from lowering/raising prices. ❖ If the price elasticity of demand is below 1, then the product is saidto be price inelastic, meaning that demand is not responsive to thechange in price, and therefore the ﬁrm should increase their pricesas they will be able to make more proﬁts. However, the priceincrease should be realistic, otherwise nobody will buy the product
❖ If the price elasticity of demand is above one, then the product issaid to be price elastic, meaning that demand is responsive to thechange in price, and therefore the ﬁrm should decrease theirprices as they will be able to generate more proﬁts. However, theprice decrease should be kept realistic otherwise the ﬁrm may bemaking a lost (prices below production costs) Methods of pricing: ❖ Cost-plus pricing (Mark- up) – Calculating how much it costs to doa particular job and then add on a given percentage as proﬁt. Forexample, the cost of production per unit is $10, the ﬁrm wants tomake 40% marginal revenue, and therefore 10×1.4 = $14 ❖ Psychological pricing- Prices that are just under a round numberto encourage buyers to think that items are cheaper than theyactually are. For example, a product that is intended to be sold for$10 may be priced at $9.95 ❖ Predatory/Destroyer pricing- undercutting the price of rivalproducts so that they are not able to compete. This is a type ofshort-term competition based pricing with intentions of drivingout competitors out of the market. Prices are usually put belowproduction costs – meaning that the ﬁrm is making a lost, withthem knowing that it will be able to drive out the competitor.Prices are raised back up later after the rival ﬁrms are driven outto make proﬁts once again. It is said to be anti-competitive and isbanned in several countries such as the US. ❖ Penetration pricing- bringing out the product in a market with alower price in order to attract customers to establish marketshare. Price is raised as market share increases in order to makemore money as the ﬁrm knows there is a baseline of consumerloyalty. ❖ Skimming- Bringing out a new and unique product with featureswhich competitors do not have. As other ﬁrms are unable tocompete, the ﬁrm is able to charge a high price, knowing that
customers will pay for it. The price is lowered as time passes asrival ﬁrms develop similar technologies. ❖ Prestige pricing - Pricing for ‘Prestigious Products’ such as LouisVuitton and Ferrari. The price is kept relatively high and never fallsas they carry a ‘high quality’ image.