Price HL by leader6


									             Price HL
IB Business & Management
          IB2 Higher Level
   What is price penetration?
   What is price skimming?
   What is price leadership?
   What is cost plus pricing?
   What is a variable cost?
   What is a fixed cost?
Lesson objectives
   By the end of the lesson, students should be
    able to: -
       Understand the difference between cost based
        pricing, competition based pricing and market
        based pricing.
       Identify the different pricing strategies available to
Cost-based strategies
Marginal-cost pricing
    The marginal cost is the addition to the total cost
     for producing one extra unit of output.
    Some businesses have very high fixed costs and
     very low variable costs, so when their fixed costs
     have been recovered, they can sell at any price
     above the variable.
    Any extra units sold will only add a small amount
     to their total costs.
    Examples are utility companies
    It is important not to publicise this low price
Cost-based strategies
Contribution pricing
   This is similar to marginal-cost pricing in that it mainly considers
    the variable costs of production.
   Businesses will want to make sure that their variable costs, such
    as raw materials, are covered but also need a contribution
    towards the fixed costs of the business, such as rent.
   Fixed cost= $400 and variable costs = $6 per unit, $600 for 100
    units sold.
   The business prices the product at $11. This gives a contribution
    to fixed costs of $5
                   $5     = 80
   The fixed costs will be covered by the first 80 sold, any more sold
    beyond that will add $5 profit.
   This method is often used for large orders.
Competition-based pricing
Predatory pricing
   This method is deliberately selling a product
    below average cost with the intention of
    forcing a competitor out of the market.
   In many countries this is illegal, but it is very
    hard to prove.
   In France in 2004 Amazon was convicted of
    predatory pricing by offering free delivery on
    books. Amazon did not change its policy but
    simply kept paying the $1000 a day fine.
Competition-based pricing
Going-rate pricing
   This is where the business price their products at
    whatever the prevailing market price may be.
   This is likely to be if the market is highly transparent,
    the business would lose most of its sales if they
    charged a higher price.
   They would not want to charge a lower price as it
    will earn a lower profit per unit and may even start a
    price war.
   Agricultural markets are a good example of this.
Market-based pricing
Price discrimination
   Most markets can be broken down into
    different sub-groups. It is likely that
    customers in these groups may be prepared
    to pay slightly higher prices that those in
    other groups.
   Examples include phone calls, it is more
    expensive to call during the day than in the
    evening and weekend. WHY???
Market-based pricing
Loss leaders
   Loss leaders are products sold at very low prices to
    tempt customers into a store.
   Most supermarkets offer a low-cost range, which in
    itself may not be profitable. The supermarket knows
    though that someone coming is unlikely to only buy
    products in the low cost range.
   A business can use loss leading products in its
    promotional activity.
   Walmart offer new CD albums at half the RRP.
Market-based strategies
Psychological pricing
   The price gives the customer information
    about the product. You would expect a luxury
    product to be priced at the higher end of the
    market. Pricing too cheaply may perceive a
    lack of quality.
   Psychological pricing also refers to setting
    the price just under the currency unit
   $19.99
Market-based pricing
Promotion pricing
   Special offer pricing is used to clear excess
    stock or to try and gain market share
Task: Price Wars
    The world’s largest supermarket chains (such as Wal-Mart,
     Carrefore and Tesco) have huge market power to reduce
     prices. Price reductions are a key technique used by
     supermarkets. E.g. the UK consumer has gown accustomed to
     supermarket price wars, with over a £1billion of price
     reductions each year. Price wars are also increasingly common
     in the airline and mobile phone industries.

1.   Describe what is meant by a price war [2 marks]
2.   Examine the winners and losers of a price war in the short run
     and the long run. [6 marks]
3.   Justify two forms of non-price competition that supermarkets
     might use to increase their competitiveness
Task 2: Sony PlayStation 3
    Sony launched the PlayStation 3 in late 2006. It was quick to
     win positive reviews, although analysts questioned the price
     which was set over $100 more than the Xbox 360 from
     Microsoft, its main rival. Sony said its state of the art console
     with a built in Blu-ray DVD player made the premium price
     value for money.
    Despite higher prices charged by Sony, the Japanese
     manufacturers loses money on each console sold. It makes up
     for this when customers buy several games and other software
     products during the PS3’s product life-cycle.

1.   Define the term premium price [2 marks]
2.   In the context of the case study, examine the relationship
     between a product’s cash flow position and its life cycle. [8
Task 3: Virgin Blue
    Virgin Blue is the creation of Richard Branson, founder CEO of
     the Virgin Group. The airline carrier was launched in 2000 by
     Sir Richard Branson and Virgin Blue CEO Brett Godfrey, to
     enter the Australian market. Initially set up as a low fare carrier,
     the company only flew between Brisbane and Sydney. Since
     then it has become Australia’s second largest airline, catering
     for all major cities in Australia. Customers pay for their in flight
     meals and drinks. To cut further costs, Virgin Blue uses a
     system of e-ticketing.

1.   Describe three potential pricing strategies that airline
     companies can adopt when entering a new market. [6 marks]
2.   Evaluate two possible pricing strategies that airline carriers
     such as Virgin Blue could use to increase their sales revenue.

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