Marketing Mix Price

What is price?
Price is the monetary value of a product. It is what consumers are prepared to pay in exchange
of good and services.

Factors to be considered while fixing prices

Internal factors and external factors

Internal factors
These factors are within the control of the business. They are:
1. Cost
Firstly, the selling price must cover the unit cost of producing the product. It must be cost
effective. It must bring profit for the business

2. Marketing objective of the business

The selling price must be in line with the marketing objective and strategic objective of the
business. Example
a. Previously Courts ''lowest price''. Its selling prices were low

b. IBL ''adding value to life''. High prices

3.Other marketing mix element

Price fixing also depends on product,promotion and place. Example
a. Good quality product = High price
Bad quality product = Low price

b. Shopping malls = High price

Street corners = Low price

External factors
These factors are not within the control of the business. They are :
1. Competition
Firstly, prices of competitors' product must be considered

2. Government pricing policies

The maximum and minimum prices fixed by the government must be considered

3. Types of market
a. Monopoly (single-seller)
Here high prices can be fixed. Consumers would be forced/compelled to pay
b. Perfect competition(many sellers/suppliers)
Low prices must be fixed

4. Consumers' perception
Sometimes, consumers have their own opinions about prices of any product

5. Elasticity of demand
a. Elastic demand(changing demand)=low prices
b. Inelastic demand(fixed demand)=high prices

Calculation of selling prices

Selling prices =cost per unit + profit margin

Example :
Ouput =200 units
Overheads= $400
Direct cost per unit(materials)= $ 2
Expenses =$ 4
Labour=$4

answer=$10

It is the policy of the company to fix a profit margin of 20 % on unit cost

What is the selling price ?

Cost per unit = total cost / output

Total cost= Overheads + total direct costs

= $400 + $ (10 x 200)
= $ 2000 + $ 400
= $ 2400

Cost per unit = 2400/200

= $ 12 per unit

Selling price = $ 12 + 20 %
= $ 12 + 20/100 x 12
= $ 12 + $ 2.4
= $ 14.4

Nov 94 ex 5a
Total cost =150 % x 10
=$15 per unit

Selling price = 120 % x 15

= $ 18 per unit

$ per unit

Labour 7
Material 3
Total direct cost 10
+ overheads(50/100 x 10) 5
Unit cost 15
+ profit margin 3
(20 % x 15)
selling price 18

Nov 2000 P1 ex 2b(ii) , c

Level of output Variable costs Fixed costs Unit cost
per week(units) $ $ $
100 600 400 10
200 1000 400 7
300 1400 400 6

b(ii) What price would company X charge if it produced 200 units per week? Show your
calculations
Selling price = 150 % x 7
= 10.5
c How much profit would company X make if it produced and sold 300 units per week?
Selling price = 150 % x 6
= $ 9 per unit
Profit per unit = $9 - $6
=3
Profit = 300 x $ 3
=$900

Importance of pricing
1. To increase profit
2. To enter a particular market
3. It helps increasing market share
4. The price must cover all costs of production otherwise the business can face liquidity problem

Types of pricing strategies

1. Promotional pricing(braderie)
2. Penetration pricing (this is used for new products mainly)
3. Price skimming (this is used for new products mainly)
4. Psycological pricing
5. Cost plus pricing
6. Competitive pricing

Promotional pricing
Here a product is sold at a very low price for a short period. This may be during off season or
launching of a product or business for example Pride Mark

Advantages:
1. Helps increasing sales
2. Helps lquidating stocks
3. Helps launching a new product

Disadvantages:
1. Low sales revenue due to low selling price
2. Low profit (low net profit margin)
3. Consumers may underestimate the efficiency(quality) of the product
4. Sometimes customers may buy only during promotions

Penetration pricing
Here a low initial price is set that helps entering a market, for example US Cola pricing
This is to create an impact on the market or to stimulate people to try the product, that is, the
price is set lower than the competitors' prices.

Advantages:
1. It ensures that sales are made
2. It helps entering a new market

Disadvantages:
1. It can create a bad perception(impression) among buyers
2. Low sales revenue because of low price
3. Consumers or the authority may object price increases, foe example the Consumer Protection
Unit

Skimming price
Here, a high initial price is set especially when the product is new on the market. Firms try to get
the maximum right at the beginning. Here, high prices reflect the novelty factor.

Advantages:
1. It reflects that the product is of high quality
2. It helps recovering research and development costs
3. Sales revenue is high because of the high price

Disadvantages:
1. Demand may be low because of high prices
2. It can create a bad impression among buyers. The latter may believe that the quality of the
product is degradating

Psycological pricing
This is an approach where particular attention is paid to the effect that the price of a product will
have upon consumers' perception of a product. In other words, additional prices can be fixed, foe
example Courts -Rs 999 , Cash and Carry Rs 1999

Advantages
1. It creates an impression that the good is cheap
2. High sales revenue can be generated
3. Helps attracting customers

Disadvantages :
1. It is subjective or dependson consumers
2. High price can reduce demand on sales

Competitive pricing
This involves putting prices in line with competition prices or just below their prices. This is a
move to capture more of the market .

Advantages:
1. High sales due to realistic price
2. It helps the business to increase its market share

Disadvantages:
1. It can bring price-cutting war
2. Consumers can believe that the product is inferior for example Black Eagle Beer

Cost plus pricing

A percentage is added to unit cost of the product

Unit cost + % profit = Selling price

Sometimes a fix amount is also added to unit cost. In other words,it involves estimating the
average total cost and adding a % mark up for profit

Advantages :
1. It is easy and simple to apply
2. Costs are surely covered. It helps making profit

Disadvantages
1. The price might be high which can reduce sales revenue

C/W
Output = 500
Overheads = $ 2000
Total direct cost = $ 3500
It is the policy of the business to add 10 % profit mark up to the unit cost
Calculate the selling price

Solution :
Cost = (2000 + 3500 ) / 500
= 5500/500
=$ 11 per unit

Selling price = cost + % profit

= 11 + (10/100 x 11)
= $ 12.10 per unit