1.3.3 Pricing strategies

6 Pricing strategies

1. Cost plus - Calculating cost of production and adding a % markup to guarantee profit

2. Price skimming - Setting High price at launch and lowering over time

3. Penetration

4. Predatory

5. Competitive

6. Psychological

Cost plus pricing

Benefits

Calculating cost of production and adding a % markup to guarantee profit

Typically used for standardised goods eg washing machine

+ Simple to calculate

+ Guarantees profit

Price Skimming

Setting High price at launch and lowering over time

+ Allows quick Break-even on RnD + Marketing costs

+ Effective for established brands where there is high demand for new product

Price Penetration

Setting a low price to attract customers and raising once they have enough customers eg for low differentiated products

+ Attract Price Sensitive customers + Captures Market Share

Predatory pricing

Setting price really low to drive out competitors

Competitive pricing

Setting prices based on competitors prices

Typically used in Highly Competitive Markets to maintain market share

Psychological pricing

Pricing to influence a customer's perception of price to make a price more attractive eg 3.99

5 Factors influencing pricing strategies

1. Level of differentiation/USPs

2. PED

3. Competition

4. Strength of branding

5. Stage in Product Life Cycle

How does the PED affect the price strategy of a business

Price elastic products should set lower prices eg Competitve pricing

Price inelastic products can charge Higher prices eg Price Skimming

Effect of Competition on Pricing strategy

High Competition market - Business must set low prices to remain competitive eg Competitve pricing, Penetration

Low Competition market - Business may be able to set higher prices eg Price Skimming, Cost-plus