ZIMSEC O Level Business Studies Notes: Marketing: Pricing

  • Price is a given value that will purchase a finite amount of a product or right to use that product
  • It is usually the amount of money expected, required, or given in payment for something although it can be in another form other than money
  • The price of a product is usually determined by:
    1. The cost of production as in the long run the business has to cover the expenses incurred in making the product and/or bringing it into a salable condition
    2. Demand form customers i.e. the price that customers are willing to pay
    3. The behavior or prices of that competitors are charging on similar goods
    4. Other elements of the marketing mix
    5. The business’s own policy and objectives
  • When setting up the price of a product a business typically has the following objectives:
  • To maximize its profit
  • To achieve a set target of profit
  • To increase its market share
  • To maximize sales revenue which may mean charging a lower price to achieve more sales revenue
  • To have an acceptable profit margin
  • To reduce the level of risk that the business faces as it operates

Price and Quality

  • Quality is defined as fitness for a particular purpose
  • While in normal cases price varies inversely with demand i.e. increasing the price of a product reduces demand
  • For some goods the opposite is true
  • These are known as vebben goods or goods of snob-appeal
  • Vebben goods are goods whose demand increases when their price increases examples include flashy products like Rolls Royce, Art and Jewelry
  • In reality there is only a tenuous relationship between quality and price
  • While a certain level of costs have to be covered to ensure quality the two are not the same
  • For example the cost of making an iPhone is $225 yet the device often retails for a minimum of $669 and often more to appeal to the high end market
  • The cost of making Beats By Dre headphone pair is $10 yet they retail at over $200
  • Giffen goods are also goods that behave in a similar way to goods of snob appeal but  in a more complex fashion that is beyond the scope of Ordinary Level

Price and the Product Life Cycle

  • Each stage of the product life cycle presents an opportunity for the business to adjust its pricing policies to match its needs
  • For example during the Launch phase penetration pricing can be used to gain market share or price skimming can be used to skim the market
  • Cost plus pricing can be used to make sure that costs are being covered
  • At the growth, maturity and saturation phase competitor based pricing can be used to fight off the competition

To access more topics go to the O Level Business Notes