Answer Sheet 6

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 £1.18 A big advantage of a cost plus
magazine is: price is that if you sell all your
We aim to make a profit on each copy sold of: £1.00 output, you are guaranteed to
(10p, 20p, 50p or £1) make a profit.
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 £1.18 A penetration price is when a
magazine is: firm charges a very low price
At 75% of the average cost of production, the £0.88 for the product, in the hope that
penetration price would be: many customers will try it at
At 50% of the average cost of production, the £0.59 the ‘trial’ price.
penetration price would be:
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 £1.18 Firms use a market-skimming
magazine is: price if they have produced a new
At 200% of the average cost of production, the £2.36 and desirable product that
market-skimming price would be: customers will want even at a
At 400% of the average cost of production, the £4.72 high price.
market-skimming price would be:

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 A market orientated price is
based on market research.
Fashion Today £2.20
You could use the average
Garb £3.00 price of your competitors as
World of Clothes £3.50 the price for your magazine.
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
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