Price Strategies and Elasticity in Demand

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 is less revenue made per unit sold and furthermore customers may view the 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 to compete. Moreover, prestige brands such as Louis Vuitton and Rolex are able to set ‘prestige pricing’ as there products are viewed as extremely high quality. Price elasticity of demand – a measure of responsiveness of demand to a change in price. ❖ Measures how much the quantity demanded changes following a change in price ❖ E.g. Aaron sells fruit and vegetables one week and lowered the price 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 oranges only dropped by 2%. Demands for his oranges are inelastic. ❖ *Knowledge of elasticity of demand helps sellers decide how much to 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 said to be price inelastic, meaning that demand is not responsive to the change in price, and therefore the firm should increase their prices as they will be able to make more profits. However, the price increase should be realistic, otherwise nobody will buy the product ❖ If the price elasticity of demand is above one, then the product is said to be price elastic, meaning that demand is responsive to the change in price, and therefore the firm should decrease their prices as they will be able to generate more profits. However, the price decrease should be kept realistic otherwise the firm may be making a lost (prices below production costs) Methods of pricing: ❖ Cost-plus pricing (Mark- up) – Calculating how much it costs to do a particular job and then add on a given percentage as profit. For example, the cost of production per unit is $10, the firm wants to make 40% marginal revenue, and therefore 10×1.4 = $14 ❖ Psychological pricing- Prices that are just under a round number to encourage buyers to think that items are cheaper than they actually 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 rival products so that they are not able to compete. This is a type of short-term competition based pricing with intentions of driving out competitors out of the market. Prices are usually put below production costs – meaning that the firm is making a lost, with them knowing that it will be able to drive out the competitor. Prices are raised back up later after the rival firms are driven out to make profits once again. It is said to be anti-competitive and is banned in several countries such as the US. ❖ Penetration pricing- bringing out the product in a market with a lower price in order to attract customers to establish market share. Price is raised as market share increases in order to make more money as the firm knows there is a baseline of consumer loyalty. ❖ Skimming- Bringing out a new and unique product with features which competitors do not have. As other firms are unable to compete, the firm is able to charge a high price, knowing that customers will pay for it. The price is lowered as time passes as rival firms develop similar technologies. ❖ Prestige pricing - Pricing for ‘Prestigious Products’ such as Louis Vuitton and Ferrari. The price is kept relatively high and never falls as they carry a ‘high quality’ image.