IB Business & Management:

Unit 4.4: Price

Lesson 1: The Pricing Decision(pp. 525-527,532,533-534, 552-555)

1. Think about it...What is a cynic? A man who knows the price of everything and the value of nothing. - Oscar Wilde (1854-1900), Irish authorWhat did Wilde mean by this quote?Why is knowing or understanding the value of something more important than knowing its price? Why is this important in business?

2. Focus Questions1. Who or what are the price makers and takers?2. Describe and explain cost-based pricing strategies. Why are they important?3. What does it mean to have price leadership?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?

3a. The Pricing DecisionDeciding on the right price for a product is not an easy task.Many products fail due to poor pricing.Setting prices too high will turn customers off your product.Setting prices too low could create undesirable image for your company.Pricing decisions will also impact sales revenue.YOU as marketers need to have a clear understanding of this important link between PRICE and DEMAND for your PRODUCTS.

3b. The Pricing Decision: Price Makers & Price Takers

Some firms are in a much better position to set prices than other companies.The monopolist: single supplier of a product; has a high degree of market power and the ability to set its own price.Can you think of some monopoly type of companies?The monopolists can be price makers or price setters.Firms that operate in highly competitive markets with easier barriers to entry, have very little control over setting the price. These firms are the price takers.

4. Cost-Based Pricing Strategies

These strategies are based on using costs of production to determine price.Cost-plus Pricing (mark-up pricing)involves adding a percentage (%) or predetermined amount of profit to the average cost of production to determine the selling price.Both fixed and variable costs are included in this calculation.The percentage (%) is called the mark-up or profit margin.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.This method is easy to use and calculate price, but does not focus on the needs of the customer.A similar strategy is floor pricing used for economy brands.A very low price is set to appeal to price-sensitive customers.

5. Competition-Based Pricing Strategy

Also referred to competition-orientated pricing; based on the prices being charged by its competitors.Prices can be set equal to, lower than, or higher than those charged by other firms.This strategy does not usually take into consideration the costs of production or the level of demand for the firms product.Price leadership:used for best-selling products or brands.few substitutes in the eye of the customer.competitors follow the leader by making their prices based on the prices set by the market leader.

6a. Market-led Pricing Strategy

This strategy relies on the actions of competitors.based on the level of customer demand or level of demand in the industry where the firm operates.Penetration Pricing:is a strategy used for a new product to help establish itself in the industry.this involves setting a low price in order to gain market share and brand awareness.as the product establishes itself, prices can be raised.this strategy is suitable for mass market products that sell in large volumes.Highly suitable for products that have a high price elasticity of demand (p. 542).

6b. Market-led Pricing Strategy

Skimming Pricing:Price skimming is a strategy used for technologically advanced and innovative products.A high selling price is set to recoup the costs of research and development.This strategy can create a unique, high quality or prestigious image for the products.Few substitutes in the market, so can charge a high price.Other competitors will want to enter this market due to the high profit margins.Prestige Pricing:involves a firm permanently setting a high price because of the image, reputation, or status linked with the product (designer clothes).Price is not a major concern for these customers. :)

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