1.3.3 Pricing strategies

Pricing

The process of pricing is the choice of pricing strategy that a business makes when setting prices for their products or services

Cost plus pricing

Set a price of product or service which covers costs and provides good profits margin

+protects profit margins

+easiest methods of pricing to apply

-doesn’t take into account the prices of competition

Skimming pricing

Price is set high to start when launching s product which

+can establish upmarket image

+can harvest high profits early to prepare to pay a premium price

-customers may be put off from buying due to high price

Competitive pricing

Some products or services we priced in line with competitors

+useful in a market with a dominant brand

-pricing at competitive rate may not cover all of the costs of some smaller businesses which cannot get economies of scale

Penetration pricing

Prices start low on a new product to encourage sales and persuade customers to try the product

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

-consumers may have bought anyway even without low start price

-expensive as it eats into profits by reducing sales revenue

Predatory pricing

In oligopolies, existing businesses may do aggressive price cutting to deter competitors out of market

+drives competitors out of market to discourage new entrants

-depends on price elasticity of product as if it’s low it won’t make much of a difference to customer demand

Psychological pricing

Pricing at £1.99 instead of £2

+idea for products which want to project a premium image

-can be high risk if comparable products are available for a lower price consumers

Factors that determine pricing strategy

Number of USP

Price elasticity of demand

Level of competition

Strength of brand

Stage of PLC

cost and need to make profit

Elastic demand

Homogeneous products which have lots of substitutes will have to price close to competitors

Too high and consumers switch to alternatives

Too low and consumers may perceive the product as inferior

Inelastic demand

Unique products which have few alternatives will be able to command premium prices as consumers will be unable to switch and therefore willing to pay the price

Pricing in launch stage

Price skimming if product is unique and business wants to claw back R&D costs

Pricing in growth or maturity phase

Price close to competitors after new imitations enter the market place

Pricing at maturity or decline stage

May be prices lower to close stocks before new launch of product

Online sales affect on price

Websites can offer lower prices as they don’t pay overheads

Many online retailers have dynamic pricing which is constantly checking and updating based on competition prices

Price comparison sites

Customers are able to shop around using sites to compare prices or insurance