VII. Give a summary of the text. Pricing

Price is one element of the marketing mix. A business must decide how to price its product. In making this decision it needs to consider:

• what are the prices charged by competitors;

• how prices can be used to increase sales of the product;

• whether the price will cover costs of production.

Competition based pricing. One factor which is likely to influence is the price of similar competitive products. To sell a bottle of Tresor, produced by L’Oreal, at ₤50 a bottle when Chanel № 5 is selling at ₤30 a bottle may lose L’Oreal sales. On the other hand, to sell it at ₤10 might not increase sales because consumers might think that Tresor was a lower quality perfume. Any business needs to think carefully about the price charged by rivals. When a perfume house sets a price which is roughly the same as that set by other perfume houses, it has decided to avoid price competition. Instead, it could attempt to get customers through advertising attractive packaging or other marketing means. On the other hand, some businesses deliberately attempt to undercut their competitors’ prices. In 1993 and 1994, for instance, The Times newspapers deliberately cut its price from 45p to 30p and then to 20p a copy to raise sales.

Market orientated pricing. Whilst thinking about prices charged by competitors, the world’s perfume manufacturers also use a number of other pricing strategies to raise sales and profits. These strategies are called market oriented pricing strategies because they are based on analyzing the market and its characteristics.

Discounts, special offers and sales. To encourage consumers to buy, the perfume houses often run special offers. The price of a bottle of perfume might be lower if another product is bought at the same time. Discounts might be offered at a particular time of the year. Top perfumes are rarely reduced in a sale because this would affect their high class image. However, many other products, like clothes, are sold at a lower price in sales.

Price discrimination. The perfume houses sell perfumes at different prices in different areas of the world. Selling the same product at different prices to different segments of the market is known as price discrimination. The perfume houses attempt to charge what the market will “bear” in order to earn the highest profit possible in each market. If, for example, consumers in the USA were prepared to pay a higher price for a bottle of Chanel №5 than consumers in the Middle East, then Chanel might charge a higher price in the USA.

Penetration pricing. A new competitor to the perfume market might be tempted to use penetration pricing. This is charging a lower price for a product at the start in order to gain market share. Once a product is established in the market, the business would raise its price. This is suitable for products where price is important in influencing spending decisions and where there is a long term market for the product. The problem with using this strategy with perfumes is that price can be linked to quality in the minds of consumers. Consumers may be happy to buy cheap sample bottles, but a low priced bottle of perfume could be seen as low quality.

Creaming. Creaming (or skimming) is the opposite of penetration pricing. It is setting a high price for a product initially and lowing it later on. It is used, for instance, with hi-tech products. When video machines first came out, they cost thousand of pounds. They were bought by companies and enthusiasts who were prepared to pay a high price for a product. However, to create a mass market for the video machines, the manufacturer had to lower the price. Again, a perfume house is unlikely to want to lower prices when a product reaches the maturity stage of its life cycle because price is often linked to image of quality with perfumes.

Cost based pricing. Perfume manufacturers are in business to make a profit. Charging a price similar to competitors is one way to set prices but might lead to losses. Another way would be to base price on costs of production. A retailer like Superdrug might use cost plus pricing. It could calculate the cost of selling a perfume, add a make-up or profit margin for its profit and this would then be the price of the bottle. The cost is the average cost and is made up of:

~ the variable cost – mainly the cost of buying the bottle from the distributor;

~ the fixed cost – such as wages of staff, rent, heating and lighting.

When the price covers both the average fixed and variable costs of the product, the business is said to be full-cost pricing. Sometimes, another competing retailer might run a special offer on a product line. Superdrug might respond by cutting its prices too, below the full-cost price. So long as the new price more than covers the variable cost, it will at least make some contribution towards paying the fixed costs of the business. This contribution might be far more than if Superdrug didn’t cut its price and sales of the product fell dramatically. In 1993, Superdrug was, in fact, in dispute with the major perfume manufacturers. They refused to sell to Superdrug unless Superdrug charged the high prices found in retailers like Harrods. The manufacturers didn’t want perfume to be sold on price. Superdrug said that its prices were based on its costs. If it had lower costs than Harrods, why should it not be allowed to sell at a lower price? The manufacturers won and have forced Superdrug to sell at higher prices than it would like to. This shows that there are many different ways to fix a price for a product.

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