8/9/2019 Answer Sheet 6

1/1

CHOOSING A PRICING POLICY

The examples in this sheet use the decisions made on answer sheet 5, and are illustrations.

1. Using a Cost Plus Price

The average cost of producing one copy of the

magazine is:

1.18

We aim to make a profit on each copy sold of:

(10p, 20p, 50p or 1)

1.00

The price per copy will be: 2.18

How has this 'cost plus' price been calculated?

By adding the profit per unit (the mark-up) to the average production cost of each magazine.

Why is it not a good idea to choose too high a profit margin on each copy sold?

Too high a profit would result in too high a price. This may reduce sales dramatically .

2. Using a Penetration Price

The average cost of producing one copy of the

magazine is:

1.18

At 75% of the average cost of production, the

penetration price would be:

0.88

At 50% of the average cost of production, the

penetration price would be:

0.59

What is the big disadvantage of using a penetration price for your first issue?

A penetration price is usually so low that you will make a loss however many copies you sell

What do you think you would do to the price for issue 2?

Issue 2 will have a higher price. Readers may now be brand-loyal and buy at the new price.

3. Using a Market-Skimming Price

The average cost of producing one copy of the

magazine is:

1.18

At 200% of the average cost of production, the

market-skimming price would be:

2.36

At 400% of the average cost of production, the

market-skimming price would be:

4.72

If your magazine is going to be very popular, what do you think other publishers would do?

Other publishers will copy a popular idea and bring out their own version of the magazine.

Why does this mean that a market-skimming price is a very good idea in the short term?

This price allows Pepper to make as much profit as they can before the competition copy the idea.

4. Using a Market Orientated Price

Three magazines which are similar to the one we intend to launch are:

Name of magazine Price

Fashion Today 2.20

Garb 3.00

World of Clothes 3.50

The average price of these magazines is: 2.90

The pricing policy I have chosen to use is market-orientated because:

Research shows that the market is competitive. My survey indicates that this price should do well.

The price I have chosen for the first copy of the magazine is 2.90

Answer Sheet 6

Holdsworth Associates

A market orientated price is

based on market research.

You could use the average

price of your competitors as

the price for your magazine.

A big advantage of a cost plus

price is that if you sell all your

output, you are guaranteed to

make a profit.

A penetration price is when a

firm charges a very low price

for the product, in the hope that

many customers will try it at

the trial price.

Firms use a market-skimming

price if they have produced a new

and desirable product that

customers will want even at a

high price.