Presentation on the Basics of Pricing.

1. How to set the price.
By Haajira and Amy
Today Haajira and myself are going to be talking about how to set the price and the basis of some common pricing methods.

2. What are we going to talk
about?
• There are a number of pricing techniques that
can be used within a business.
• We are going to discuss the relatively basic
ones: market orientated pricing, cost plus, cost
leader and price sensitivity.
• Strategies should be used in order to gain
customers and their loyalty.
As you know price is one of the essential elements of the 4Ps of marketing and it can be argued that achieving a successful product works alongside finding the ideal
price. Although we know this is a fairly difficult task to achieve.
One reason why this is a complicated process is due to the fact that there is an overwhelming amount of competition that holds a variety of products and prices.
Delivering a price that gives a sufficient competitive advantage can be helped by a number of methods that will be discussed now.

3. Loss-Leader
• Products sold below cost price.
• More customers = more profit
• Make up for loss.
Loss leader is when a business sells a product below cost price in order to attract customers. Although this seems like a negative idea there is an increase in profit as
there are more customers, therefore the loss is made up for. This would be a positive idea for larger supermarkets such as Tesco as they mass order due to their
economies of scale policy so, therefore they are able to make up for any losses. However this would not be a good idea for a smaller corner shop as they do not have as
many customers and have a limited profit to bulk buy therefore they would find it harder to make up for the loss. An ethical issue surrounding this is that by using this
method supermarkets are attracting all customers and smaller businesses are unable to survive.
(Loss leader The AMA Dictionary of Business and Management, 2013)
(http://www.accounting.com/loss-leader-pricing)

4. Market oriented pricing
• Compares similar products being offered on the market.
• Based on analysis and research of the target market-
‘One of the most enduring pieces of advice for
executives over the past 30 years has been, “Focus on
your customers!”’ (Stanley F Slater, John C Narver 1995)
• In a relative sense this is rather simple but can be very
effective.
• Can be sufficiently quicker than other methods.
The market oriented pricing strategy can be described extremely simply by using the Google definition - Google states that it comprises of comparing similar products
being offered in the same market.
Once you have collected the data and analysed the company will either decide to put their price up or down. For example, if your product has an extra feature over its
competitors therefore making it better value, you could increase the price to attract the right target market and vis visa.
Of course the reliability of the results depends on whether or not the data you collected is sufficient and accurate.
(European Journal of Marketing, Defining Marketing: A Market-Oriented Approach By, Christian Grönroos)
(Market Oreintation and the Learning Organisation, July 1995. Stanley F Slater, John C Narver, Journal of Marketing. Volume 59, pages 63-74.)

5. Price Sensitivity
• Ultimately the amount by which changes in
products tend to affect consumer demand
behaviour.
• Find Optimum price.
Price sensitivity is the amount by which changes in a products cost affect the consumer market behaviour. This method can be used to find the optimum price for a
product. This is ideal for the majority of businesses as they need to know what price to use in order to gain the most profit.
( Innovativeness and price sensitivity: managerial, theoretical and methodological issues. Goldsmith, Ronald E.(1997) )

6. Cost plus pricing
• It seeks to set a price that takes into account
all relevant costs of production
• This involves finding the break even price of
each unit, then a mark up is set for
each unit.
• Very effective.
The cost plus pricing method involves adding together the direct material cost, direct material cost, direct labour costs and overhead costs for a product and adding to
that a markup percentage. This allows us to create a profit margin in order to set the price of the product.
This is arguably more time consuming than other methods, as the calculations can be relatively complicated and it is usually monitored by regulations but can read to
more intelligently analysed price at the end. (The Dynamics of Cost-Plus Pricing, Ward Hanson
Managerial and Decision Economics, Vol. 13, No. 2 (Mar. - Apr., 1992), pp. 149-161) This process is usually used in a business that is either a market leader or is producing a
product that is highly customised. However, this process can also be very popular with smaller businesses where their product price is determined by an established
market leader. (An empirical investigation of the importance of cost-plus pricing, Gerald Vinten, Managerial auditing journal, Published on 02 2005
Volume - 20, Issue - 2, Pages 125 -137.)
The example on the slide explains the methods relatively simply - you can see that the total cost is £100 000, so we know that if they produce 10 000 units the cost per
unit is £10. To this you add the markup percentage, which as you can see is 100% of the cost. You set the selling price by adding together the cost and the markup
percentage, so it is £20. (http://www.tutor2u.net/business/reference/what-is-cost-plus-pricing)

7. Freemium
• Type of business model.
• Core product.
• Premium product.
• Not the same as free trail.
• Examples Skype
Freemium is a type of business model, which consist of a core product being provided for free to a large audience and a premium product being sold to a fraction of the
user base. The key point to remember about this is that it is not the same as a free trial. A key example for this is Skype, model is located on the handouts we passed out
earlier, as you can see in the model canvas the core product is the free calls, while the revenue comes from the Skypeout subscription Skypeout is the premium product
here.
(Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Osterwalder, Pigneur, 2010)
Thank you for listening, we would now be happy to answer any questions you have to offer.

8. This was handed out on an A4 piece of paper, and was distributed to all pairs who were listening to our presentation.
One sections refers to the slide before on ‘Freemium’ and the other section is our multiple choice questions.