theme 1 business a level

pricing

The process of determining the value or cost of a product or service, often influenced by factors such as demand, competition, and production costs.

• Cost Plus

• Competitive

• Penetration

• Predatory

• Psychological

• Price skimming

6 types of pricing strategies used by businesses

Cost plus pricing

A pricing strategy where a fixed percentage is added to the total cost of producing a product to determine its selling price. covers the costs and provides a profit margin.

benefits of cost plus pricing

• protects the profit margins of the business

• easiest method of pricing to apply

• easy to estimate profit levels

drawbacks of cost plus pricing

• this method of pricing does not take into account the prices of competition

Skimming pricing

A pricing strategy where a high initial price is set for a new or innovative product, which is gradually lowered over time to attract different customer segments.

the high price at the start will create high profits and may be used to pay back research and development costs and maximise revenue before competitors enter the market. e.g iphone

benefits of price skimming

• a high starting price can establish an upmarket image

• for innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget/item/product and are prepared to pay a premium

drawbacks of price skimming

• cheaper imitations of the product may appear on the market too soon and take sales away from the product

• risky strategy as customers may be put off from buying due to the high price

competitive pricing

A pricing strategy where a product's price is set based on competitors' prices, aiming to attract consumers while maintaining market share. - means that customers will have to judge a product on non price methods

benefits of competitive pricing

• useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices to encourage customers to buy

drawbacks of competitive pricing

• pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones

penetration pricing

A pricing strategy where a product is initially offered at a low price to gain market share quickly, then gradually increased. This method encourages customers to try a new product and build brand loyalty.

benefits of penetration pricing

• works best with new products being launched to encourage consumers to try the product

• gain initial market share

• initial brand loyalty

drawbacks of penetration pricing

• consumers may have bought anyway, even without the low start price

• expensive as it eats into profits by reducing sales revenue

• may attract price-sensitive customers, making it difficult to raise prices later.

predatory pricing

A pricing strategy where a company sets prices extremely low, often below cost, to eliminate competition and gain market dominance. This practice can lead to higher prices once competitors are out of the market. used in oligopolies (markets with just a few large businesses) pushing competitors out of the market

benefits of predatory pricing

• drives competitors out of the market or set a barrier to entry to discourage new entrants to the market

• helps establish market dominance and increases market share

drawbacks of predatory pricing

• depends on the price elasticity of the product - if it is low then a lower price won’t make much difference to customer demand

• may result in legal scrutiny for anti-competitive practices

psychological pricing

A pricing strategy that uses consumer psychology to influence purchasing decisions, often setting prices just below a round number to make them appear more attractive, such as pricing an item at $9.99 instead of $10.

benefits of psychological pricing

• ideal for products which want to project a premium image - the price might be a part of the appeal

• can enhance perceived value and boost sales by attracting budget-conscious consumers

• makes prices look lower

drawbacks of psychological pricing

• can be high risk, if comparable products are available for a lower price consumers could be tempted away

• may confuse consumers about the actual price, leading to dissatisfaction or distrust.

factors that determine a pricing strategy introduction

• number of USPs (unique selling point)

• price elasticity of demand

• level of competition in the business environment

• strength of brand

• stage in the product life cycle

• costs and the need to make a profit

distribution

The process of making a product or service available for the consumer or business user that needs it. It involves transportation, warehousing, and supply chain management.

4 stage distribution channel

1. manufacturer

2. wholesaler

3. retailer

4. consumer

e.g Costco is a wholesaler

benefit of the wholesaler is that they can offer trade credit terms to the small retailer

3 stage distribution

1. manufacturer

2. retailer

3. consumer

e.g. Direct-to-consumer brands, eliminating the wholesaler, applies to most mass market products

2 stage distribution

1. manufacturer

2. consumer

e.g this can include factory outlet shops

e.g holiday companies that do not use agents

distribution channel

A chain of business / pathway through which goods and services pass from the manufacturer to the consumer, including intermediaries like wholesalers and retailers.

wholesaler

A business that buys large quantities of goods from manufacturers and sells them in smaller quantities to retailers or other businesses.

retailer

A business that sells goods directly to consumers, typically in smaller quantities, often through physical or online stores.

agent

A person or business that acts on behalf of another party in negotiating the sale or purchase of goods, earning a commission on transactions.

viral marketing

A marketing strategy that uses social networks to promote a product, encouraging consumers to share content to gain attention and increase sales. (spreading information through word of mouth or internet)

innovation

The process of creating new ideas, products, or methods that improve efficiency or effectiveness, often leading to enhanced competitive advantage.

product innovation

launching new or improved products (or services) on to the market

process innovation

finding better or more efficient ways of producing existing products, or delivering existing services

benefits of product innovation

• greater perceived added value

• higher prices

• build early customer loyalty

• enhanced reputation as an innovative business

• increased market share

benefits of process innovation

• reduced costs (becoming more efficient)

• improved quality

• more responsive customer service

• greater flexibility of operations

what is the design mix

The design mix refers to the combination of factors that influence the design of a product, including function, aesthetics, and cost

bespoke design

Means custom-made, tailored to meet the specific needs and preferences of an individual client or customer, it is personalised

standard design

products or services that are sold as standard, the customer cannot add extra benefits to their products

promotion

the use of marketing tools to bring a product or service to the attention of potential buyers

direct marketing

involves communicating directly with targeted consumers, on what customers have bought before, often through methods such as email, phone calls, or direct mail.

personal selling

the process of persuading customers to purchase a product or service through interaction and relationship building. usually through a sales person

above the line marketing

involves mass media methods for targeting larger and more general customers e.g radio, TV, Cinema, Newspapers

below the line marketing

refers to targeted audiences through specific channels, main methods include, Public relations, e.g Ryanair PR stunts, search engines, social media marketing

Public relations

aims to build a relationship between the business and the public to create a favourable corporate image - it is long term, can be very low expenditure e.g sending their products to someone to review

consumers find it more believable

sponsorship

positive association of the product with a celebrity or sport - football, F1

can be very expensive

difficult to tell what impact this has on brand loyalty or sales