1.3.3 Pricing Strategy

What is price?

The amount of money that the customer has to pay to receive the good or service

What is pricing?

Pricing is a process of setting the value that a business will receive in the exchange of services and goods

What is a pricing strategy?

A pricing strategy is a business’s plan for setting its prices over the medium to long term to achieve marketing objectives

What are the different pricing strategies?

• Cost plus

• Price skimming

• Psychological

• Predatory

• Competitive

• Penetration

What is cost plus?

• The business calculates the cost of production and then adds a markup to determine the final price

• The markup covers the cost of production plus the business’s desired profit margin

What is the formula to calculate the cost plus price?

Unit cost + (markup percentage x unit cost)

What is price skimming?

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

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

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

• This is effective when an established brand is introducing a new product and there is a high demand for it

What is penetration?

• The business sets a low price for a new product when it is first introduced

• One it has enough customers, the business will start to raise the price

• This is effective when a business wants to quickly capture market share and attract price-sensitive customers

What is predatory pricing?

• The business sets prices so low that it drives its competitors out of the market

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

What is competitive pricing?

• The business sets its prices based on its competitors’ prices

• This is effective when a business is in a highly competitive market and wants to maintain its market share

What is psychological pricing?

• This pricing strategy takes into account the customer’s emotions, beliefs and attitudes towards the product/service

• For example a business may set its prices at £9.99 instead of £10, as customers perceive the former as better value

Factors to consider when choosing a pricing strategy

• Number of USPs / amount of differentiation (products with many USPs and high differentiation can command higher prices)

• Price elasticity of demand (if a business is in a highly competitive market with many substitutes, lowering prices will increase revenue, businesses should set lower prices if the product is price elastic, and higher prices if the product is price inelastice)

• Level of competition (in highly competitive markets, businesses may need to set their prices low to remain competitive, in less competitive markets, businesses may be able to set higher prices)

• Strength of the brand (a strong brand with a loyal customer base can command higher prices)

• Stage in the product life cycle (in the introduction stage, prices may be set lower to attract customers and build market share, in the growth stage, prices can increase as demand for the product increases, in the maturity stage, prices may need to be lowered again)

• Costs and the need to make a profit (prices must cover the cost of production and provide a reasonable profit margin)