Monday, August 6, 2012

Chapter 20: The marketing mix: price

The role of price in the marketing mix

When pricing a product, a business needs to choose one that fits with the rest of the elements in the marketing mix. E.g. high price so that consumers thinks they are buying high quality goods, low price for low quality goods, or competitive prices in a market with a lot of competition.

Price determination in a free market

People think that prices are determined by the seller of the product, but that is not quite so. Prices are driven by market forces called demand and supply.


Demand is not only that people want to buy a product, but that they want it can are willing to pay for it. Prices can affect how much demand there is for a product. Normally, if the price goes up, demand goes down, and vice versa. This can be shown on the graph below:

Supply also varies with price. However, it is different. If the price goes up, then the owners would want to be supplied with more products to take advantage of the high price, thus the supply goes up (and vice versa). This can be demonstrated on the graph below:

The market price
For the market price to be determined, demand and supply must all be put onto the same graph. The place where the two lines (called curves) cross is called the equilibrium, where the same number of goods are demanded and in supply resulting in no leftovers. All the products are demanded and all of them are sold.

Factors that affect demand and supply

The graphs above assume that the demand and supply of goods are fixed. But these things can change, which shifts the demand or supply curve to the left or the right in the graph. Changes in the price affects where you are on the curves. But changes in other factors affect the position of the curve on the graph.

Factors affecting demand

  • The popularity of substitute products. (products that can be used instead of the product)
  • The popularity of complementary products. (products that require each other or are used together)
  • Changes in income.
  • Changes in taste and fashion.
  • Changes in advertising.
The result is: if demand falls, the market price and sales will fall, and the demand curve will shift to the left. If demand rises, the market price and sales will rise, and the demand curve will shift to the right. It is illustrated on the graphs below.

Elasticity of demand

Elasticity of demand is how easily demand can change when prices change. A product with an elastic demand curve would have a higher change in demand than a change in price (uses percentages). A product with an inelastic demand curve would have a lower change in demand than a change in price. The elasticity of demand of a product is mainly affected by how many substitute products that it has.

Factors affecting supply

  • Costs in supplying goods to the market:
    • Price of raw materials.
    • Wage rates.
  • Improvements in technology:
    • Makes it cheaper to produce goods.
  • Taxes and subsidies:
    • Higher taxes mean higher costs.
  • Climate (for agricultural products):
    • Supply of crops depend on weather.
The result is: if supply falls, the market price will rise, sales will fall and the supply curve will shift to the left. If supply rises, the market price will fall, sales will rise and the supply curve will shift to the right. It is illustrated on the graphs below.

Elasticity of supply

Elasticity of supply is how easily and quickly supply can change when prices change. How quickly means how quickly products can be produced and supplied, which is not very quick for products made by agriculture. A product with an elastic supply curve would have a higher % change in supply than a change in price. A product with an inelastic supply curve would have a lower change in supply than a change in price.

Pricing strategies

If a product is easily recognizable from other products, it would probably have a brand name. And if it has one, it would need a suitable pricing strategy to complement the brand name that should improve its brand image. Here are the strategies that are used:

Cost-plus pricing

Cost-plus pricing involves covering all costs and adding a percentage mark-up for profit.

  • + Easy to apply.
  • - You lose sales if your price is higher than your competitors price.
Penetration pricing

Penetration pricing is used to enter a new market. It should be lower than competitors' prices.

  • + Ensures that sales are made when a product enters a market.
  • - Prices will be low. Sales revenue will be low.
Pricing skimming

High prices are used when a new product is introduced into a market, partly because it has a novelty factor, and because of the high development costs. High prices could be charged because a product is high quality. One last use of it is to improve the brand image of a product, since people usually associate high price with good products.

  • + Skimming can help establish a product as being good quality.
  • - It may lose potential customers because of high price.
Competitive pricing

Competitive pricing means setting your price to a similar or lower level than your competitors prices.

  • + Sales will be high because your price is at a realistic level (not under/over-priced).
  • - You have to research on your competitors prices which costs time and money.
Promotional pricing

Promotional pricing means that you lower the prices of goods for a short time.

  • + Help get rid of unwanted stock.
  • + Can renew interest in a product.
  • - Sales revenue will be lower.
Psychological pricing

Psychological pricing involves setting the price that changes consumers perception of a product. This may be by:

  • Using high price to make using the product give the user a status symbol.
  • Pricing a product at just below a whole number (e.g. $99) which gives it an impression that it is cheaper.
  • Supermarkets charge low prices for products that are bought on a daily basis to give consumers an impression that they are being given good value for money.


  1. "The result is: if supply falls, the market price will fall, sales will rise and the supply curve will move to the left. If supply rises, the market price will rise, sales will fall and the demand curve will move to the right. It is illustrated on the graphs below."

    I think you got confused.

    Actually, if the supply falls, people are willing to pay a higher price for the product as there isn't enough! So, the market price rises. But, because there are less products, the total sales fall.

    However, if the supply rises, market price falls (because there are more products, people aren't willing to pay a high price, and shop-keepers already want to increase sales by lowering prices), so consequently sales rise.

    1. Dude Muhammad, you better improve your answer man. Not everyone can understand what you have written. I can understand but you know some people might not !

      Don't take it personally, just giving you a suggestion, bro !

    2. Muhammad Hassaan AyybMarch 26, 2012 at 7:53 PM

      Oye....whoever you are. Just shut up man ! I know what I have to write and what not to !

    3. actually...muhammad has written it correctly..can u explain Mr. Anonymous what is incorrect in his answer??I expect a reply because i dont want to get confuse and my boards are nearing...reply!

    4. muhammad ur gay af

    5. "If supply rises, the market price will rise" Who on earth can explain this? When Supply rises there is a outward shift of the supply curve so Market price falls.

    6. that's what he's saying...the ones in the "" are wrong

    7. Muhammad is obviously right

    8. Bro Muhammad you are correct but only to some extent because not all products can be treated like that off course if the supply of any of the agricultural crops decreases then prices will increase and sales revenue "mostly" not always falls.Okay. Take petrol for an example if its supply decreases then price will obviously increase but due to that it is a daily life product people have to buy it because they have no choice. So basically it depends on the product as well that what kind of a product it is :)

    9. good one you terrorist!

    10. The last user who commented is just a little dickwad isnt he.

    11. exactly! he is

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  2. Thanks Mr Muhammad indeed i did get confused over that one. It has been fixed now.

  3. Hey Muhammad,

    Dude I have my boards tomorrow for business studies. Dude this is my fault. I was looking at some other business studies website and everything written on the website was rubbish and I accidentally switched the pages and came up on your page and scrolled down and wrote what I thought about that page and not your page.

    Your page is brilliant. Really good notes on business studies. It will really help me for the business studies exam tomorrow. Thanks a lot man. And sorry again.

    Yours sincerely,

  4. "If supply rises, the market price will fall, sales will rise and the demand curve will move to the right. It is illustrated on the graphs below. "

    I'm sorry but I think this time, you must have accidentally swapped supply curve with demand curve. It is supposed to be:

    "If supply rises, the market price will fall, sales will rise and the supply curve will move to the right. It is illustrated on the graphs below"

    1. Cheers bro, sorry I took so long to answer.

  5. so for a business having an inelastic curve for demand and an elastic curve for supply is good, while having an elastic curve for demand and an inelastic curve for supply is bad!?! is that right?

  6. This is confusing

    1. Fuck you this is brilliant

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  9. These notes helped me a lot

  10. y isnt there dynamic pricing here?? :(

    1. Because dynamic pricing is an example of plane tickets in different seasons, and since plane crashes , we don't really need them in our syllabus ;)

  11. dear moh. ayyub what you are saying is completely right but then in IGCSEs demand and supply should relate to each.....i know this is very unpractical...but if the demand and supply were related in IGCSE, business studies would've been more complicated (business studies is complicated enough!)

  12. thanks guys for these wonderfully-summarized notes!

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  14. Thanks for the post. Your blog simply reminded me of the question of Industrial psychology that What to produce? When to produce?How to produce?and How much to produce?. thanks for these amazing posts.
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  18. Can someone explain for me the psychological pricing in advantage and disadvantage way please?