[MUSIC] A major consideration in the pricing decision is the effect a change in price will have on the quantity that you sell. I referred to this earlier, so let's have a little bit more deeper look into this particular topic. A number of different factors in the marketing mix will impact on the answer here, but probably the best starting point is a microeconomic analysis of the demand. Let's have a look at price elasticity of demand. Where demand is inelastic, a quantity will be sold regardless of the price. In this case, demand is completely inelastic. And therefore, the supplier, you, will have unlimited scope to increase your price. A particular quantity will be sold regardless of the price. If you think about that, there are very few examples of completely inelastic demand but maybe there's something out there that we could think about that maybe would tend towards completely inelastic demand. Something such as water. Would we pay anything for water if it kept us alive? So we would sell anything regardless of the price. Of course, the opposite to that is elastic demand. And this is where demand is limitless at a certain price, but then completely vanishes the minute that that price is increased. Demand, in this case, will be completely elastic. There's no point reducing your price below because it's limitless at that point. But the minute you go above, it disappears. It's very difficult to find an example of this, and I think the best example that is out there is probably a stock market, a stock exchange. If you've got thousands and thousands and thousands of sellers, all charging exactly the same price. And maybe they're being matched with thousands and thousands of buyers, as long as everyone has the same information, the minute that you as an individual raise your selling price, you wont sell anything at all. Because there's lots of other sellers out there at the lower price. That's elastic demand. So when we talk about price elasticity of demand, very few factors that we need to consider, the demand curve itself is rarely straight line, it's rarely linear. And this is because customers don't always react in a rational or in an even way to price increases. Some examples here are luxury goods. And actually, prices go up and you'll see demand increase is a scene of the thing to have. Cross product differentiation can also play a part here and it can give a different products, different price elasticity. Making your product different from what anyone else is selling. Organizations must also consider the competitors reaction to any prices changes that it makes. So somethings that we need to think about here are the scope of the market, how big is the market itself. If you're not sure when you're developing your business plan and there's probably some information on the Internet online, actually tells you what the total demand for your specific product tool service well. There's a quite a bit of information already out there. What is the information within the market? What I mean by that is not what's there for you specifically to look at your business plan. But what about the buyers and sellers. How much information do they have about the products and all services that are out there in this particular sector of market that you aim to move in to. I've already mentioned these, what about the availability of substitutes. That's a key point, and that does affect your price elasticity of demand. Complimentary products, disposable incomes, what about necessities and habit? Think about that. People who smoke cigarettes. What are they willing to pay? Over the last 15 or 20 years, we've seen the price of a packet of cigarettes increase exponentially. Has it stop people? Who knows? That's the aim. I've already mentioned as a few of those stop, but it's a habit forming, it's a drug. So therefore, it may not quite be as sensitive to changes in price. There are some other pricing strategies. You may need to consider and think about or maybe adopt for your particular product or service. Premium pricing, for instance. I've sort of already mentioned this. But it's about charging that little bit extra for yours. Try to signal to the market that this is a premium product. There's market skimming. Market skimming is the term that I've sort of referred to previously as well when about the new technology items that are coming. So in other words, getting as much as you can at the early stage of a product's introduction to the market. And maybe later on realizing that when moving to a more sellers, move into that particular market and the prices start to decline. You've made your bit at the top and you'll have to start reducing your prices in line with the competition. There's something called penetration pricing, which is going in at a low price to try and grab a large market share early. This is difficult. And, of course, if you're trying to compete here, with established sellers and businesses that are out there. Then maybe they can reduce their prices to match your and therefore you've lost the advantage of penetration pricing. Price differentiation maybe looking at, sometime you can differentiate your products as well. A little bit more on that in one moment. But differentiating, making a different in some way. What about loss leader pricing? Loss leader pricing is where a company will sell something below the price below would actually cause some to purchase or buy. Why would they do that? Well they do that to entice you in so that you'll actually spend more money with them later on or on different products. A good example of this are the supermarkets. If you think about these massive great big mega supermarkets, no one goes there just to buy a pint of milk or a loaf of bread. The first thing you do as you pull up outside in the great big car park is you pick up a trolley. So they're enticing you in by selling you these staple food items that below what it cost them. However, that knowing for well that you'll fill up your trolley with much more profitable products. The same company has a smaller High Street store, not one of these great big mega-stores. When you go in there you'll actually find that there's a difference between these staple items, in other words they'll be charging more. Because that type of store you do go in there for just some bread, some eggs, some milk, rice or pasta. That's called loss leader pricing, getting you in knowing that you'll spend more. Of course, product bundling is a great way. And you see this quite a lot in the games industry. What about buying a new PlayStation or Xbox? Okay, that's fine, but what we'll do is we'll throw in a few games as well. So they bundle the products together. If you look at those items separately, they're more expensive than the bundled product. And of course, sort of mention this pricing with additional features. Pricing with additional features allows you, Karl's so good at this one, allows you to sort of charge a higher price by making it sort of different, adding some additional features. Here's the basic model, with this model you get a set half include, with this model you get ABS bricks, etc., leather seats. So pricing with additional features. Discount pricing, a lot of organizations use this now. Then this is not quiet the same as a lost deed, this is where they are making a profit. And you may think, rather cynically, that there are some particular companies out there will always in sell, and always discounting their prices. But it is one way to attract new business and to attract customers. And of course the final one I'm going to talk about here is controlled prices. Okay, there are certain government restrictions if you wish on how much you can charge for gas, electricity, telephone, and the government has these specific bodies in place. These watchdog bodies in place, it'll actually control the process of those products. [MUSIC]
