Pricing Strategies

What is a price taker?

A business or businesses that accept the price set by the market.

Being a price taker is the only option under what market structure?

Perfect competition.

What 2 groups do pricing strategies fall into?

• Market-orientated strategies

• Cost-orientated strategies

What are market-orientated strategies?

When a business sets a price at the level the market is willing to accept.

What are cost-orientated strategies?

When a business sets a price related to the cost of producing or supplying the product.

Give examples of market-orientated pricing strategies.

• Market skimming

• Market penetration

• Loss leader

• Predatory pricing

• Competitive pricing

• Psychological pricing

Give examples of cost-orientated pricing strategies.

• Cost plus pricing

• Contribution pricing

• Full cost pricing

What is cost-plus pricing?

When the business a profit percentage to the average cost of producing the good. This is known as adding a mark-up.

What are the advantages / disadvantages of cost plus pricing?

Advantages:

• Changes in costs can be passed directly on to the buyer.

• Every good sold is sold at a profit.

• Easy to apply.

Disadvantages:

• Actions of competitors are often totally ignored. This can lead to loss of sales or loss of profits if a higher price could be charged because of little or no competition.

• For exporters, this method makes no allowance for currency changes that will affect the price of goods and order levels

What is market skimming?

• The business sets a high price for a new product/service when it is first introduced to the market.

• This is effective when an established brand is introducing a new product and there is a high demand for it e.g successive models of Apple's Macbook Air.

• The high price helps the business to recover its development and marketing costs quickly.

• The business will then gradually lower the price to ensure sales continue.

What does the ability to price skim depend on?

The ability to skim depends on having either a technological advantage or an advantage based on brand image.

If technological advantages exist, then some consumers, known as early adopters, are willing to purchase products so that they can be the first to own these products.

What are the advantages / disadvantages of market skimming?

Advantages:

• Helps establish high profit margins.

• Premium price adds to brand’s image and suggested quality.

Disadvantages:

• Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone).

• Early customers may be put off by the high price, limiting sales to begin.

• Need to invest into promoting the brand to support the high price charged

What is market penetration?

It involves pricing a product at a low level so that retailers and consumers are encouraged to purchase the product in large quantities.

Once they have enough customers, the business will start to raise the price.

What are the advantages / disadvantages of market penetration?

Advantages:

• It is a useful method of pricing if the market is very competitive and difficult to get into because it is dominated by a few big businesses. When the product has become established the business will increase the price.

• Helps establish brand loyalty - when the price of the product does rise from the initially low level, customers will continue to purchase it.

Disadvantages:

• Businesses sales revenue may be low as the price of the product is set low.

• When the price is increased, consumers may refuse to continue to buy the product. The business will hope that it has built up brand loyalty by the time it raises the price.

• If the price is set too low, customers may take the view that the product is low quality and therefore will not purchase it in the first place. Businesses using this policy to break into a new market may initially lose revenue.

What is predatory / destroyer pricing?

This involves setting a price low enough to drive competitors out of the market.

This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

What is loss leaders?

Where a product or service is sold at a loss (below cost price) or at cost price in order to bring customers to a business.

What are the advantages / disadvantages of loss leaders?

Advantages:

• Encourages customers to make further purchases of profitable goods while they are at the business.

Disadvantages:

• Customers may not be willing to buy other, higher-margin products.

What is competitive pricing?

This is where businesses will charge similar prices to other businesses - their competitors.

The businesses will compete by using non-price competition, such as the quality of the product, advertising and branding.

What are the advantages / disadvantages of competitive pricing?

Advantages:

• Selling prices is in line with rivals, so price should not be a competitive disadvantage to the business.

• Easy to set the price.

Disadvantages:

• Business doesn’t stand out from competitors- must attract customers using non-price methods instead e.g. providing distinct customer service or better availability.

What is psychological pricing?

This is when prices are set at the level that matches what consumers may expect to pay. Consumers perceive that they are receiving value from the price paid.

For example, a producer of shirts which has established a reputation for quality and style would set a price well above what a high street store such as Marks and Spencer might charge, even though the difference in quality may be marginal.

What are advantages / disadvantages of psychological pricing?

Advantages:

• Businesses using this tactic hope to convince potential purchasers to buy their goods in the belief that they are getting value for money.

Disadvantages:

• Some customers may see right through psychological pricing tactics and perceive it as taking advantage of them.

• Not a long term solution.