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Price

The 4 Ps - The importance of price in the marketing mix

Learning outcomes

Price refers to the value of a good or service that is paid by the customer. Price will usually cover the costs of production, allowing the business to earn profit.

Large supermarket chains (such as Walmart, Carrefour, and Tesco) use an extensive range of pricing and non-pricing strategies to compete with each other. Market research published by Which? (a consumer campaigning organization in the UK) showed that most shoppers believe large supermarkets deliberately try to mislead their customers by using a range of confusing pricing strategies. The Which? findings showed that supermarkets often use incomprehensible labelling and puzzling prices for their products. For example, without using a calculator, do you think a 600g jar of mayonnaise priced at $3.49 is better value than a 400g jar of the same branded product but priced at $2.35? Which product offers better value? Similarly, pre-packed fruits and vegetables often have very different prices compared to loose varieties of the same produce.

At first glance, customers might assume that the larger 600g jar of mayonnaise offers better value for money. At $3.49, this equates to $0.58 per gram. The smaller 400g jar is priced at $2.35, so this works out to be $0.58 per gram too! So, there is no actual saving (per gram) for customers that choose the larger jar of mayonnaise(!)

The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are to consider the appropriateness of the following eight pricing strategies (AO3):

Top tip!

Exam questions often ask candidates to suggest and justify suitable pricing strategies that can be used by a business in different scenarios, such as entering new markets. Rather than simply explaining the eight types of pricing methods that can be used, it is more important to put these into the context of the organization. For example, it might be appropriate to consider a few factors first, before advising on a suitable pricing strategy.  These considerations may include the following points:

  • Although the market might be ‘new’ for the business in question, there might be well-established competitors that already exist in the market, so penetration pricing could be used. However, price skimming might be appropriate if the firm is the first entrant to a market.

  • Unless the product is original and innovative, customers will already have perceptions about what the correct level of prices ought to be.

  • Which pricing strategy is most likely to appeal to customers? For some goods and services, price discrimination is highly suitable whilst loss leader pricing works better for other products.

  • What sort of image does the business wish to portray? Clearly, the pricing strategy used for high quality and exclusive products will be different from that used for mass market products with plenty of substitutes.

  • Finally, it is important to consider the likely reaction of competitors to the pricing strategies used by a business. If low prices are used and this sparks off a price war, then most businesses will tend to lose out in the long term.

ATL Activity - Price within the marketing mix

Watch this 9-minute introductory video about the importance of pricing strategy in the marketing mix:

Theory of Knowledge (TOK)

What is the value of a product? How do we know what the true value of art is? Consider some of these examples from the commercial world of art:

  • May 2004 - Pablo Picasso's 1905 Garçon à la pipe (Boy with a Pipe) was sold for $104m.
  • January 2010 - Alberto Giacometti's 1961 L’Homme qui Marche (Walking Man) sold for $104m.
  • April 2010 - Pablo Picasso's 1932 Nude, Green Leaves and Bust sold for $106m.
  • November 2012 - Claude Monet’s 1905 Water Lilies painting sold for $43.7m in New York.
  • May 2012 - Edvard Munch’s 1893 The Scream sold for $120m.
  • November 2015 - Cy Twombly's Untitled (New York City) sold for $70.5 million (take a look at the artwork here).
  • But perhaps the most prominent case of recent times was in December 2019, when Italian artist Maurizio Cattelan’s Comedian, consisting of only a banana duct-taped to a wall, sold for a $120,000! Cattelan said he purchased the banana at a local market for just $0.30!

How do consumers / customers / users of a good or service "know" whether the price they pay is value for money?

InThinking Business Management resources

Click the hyperlinks below to access the InThinking resources for this particular section of the IB Business Management syllabus.

Return to the Unit 4.5 The four Ps homepage

Return to the Unit 4 Marketing homepage

 

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