2.2.2 Competing on price

What is cost-plus pricing?

Setting a price by adding a fixed percentage markup to unit cost; ensures costs are covered but price may be uncompetitive.

What is price skimming?

Charging a high price for a new product with little competition; used short-term before competitors enter.

What is penetration pricing?

Setting a low initial price to attract customers and gain loyalty, then raising the price later.

What is predatory pricing?

Setting prices below average cost to drive competitors out of the market; short-term losses occur.

What is competitive pricing?

Setting prices based on competitors’ prices for similar products.

What is psychological pricing?

Using prices that influence emotions rather than logic, e.g., £0.99 instead of £1.

Factor affecting pricing: Number of USPs/differentiation

Highly unique products can charge premium prices; similar products compete mainly on price.

Factor affecting pricing: Price elasticity of demand (PED)

Inelastic goods → higher prices; elastic goods → lower prices; strong brands are more inelastic.

Factor affecting pricing: Stage in the product life cycle

Launch: penetration (if competition) or skimming (if unique); Growth/maturity: competitive; Decline: lower prices to sell remaining stock.