Advantages and disadvantages of pricing strats

Cost plus pricing advantages

• A quick and easy way of setting the selling price

• Ensures that total costs are covered and a profit is generated

Cost plus pricing disadvantages

• doesnt cover indirect costs, examples include other expenses such as rent

• Doesnt take external factors into account, example, increasing prices during boom periods to maximise profits

Competitive pricing advantages

• avoids a price war

• Encourages competition, which improves the market as a whole

Competitive pricing disadvantages

• Other elements of the marketing mix must be better than the competition’s to ensure sales

Price skimming advantages

• sufficient hype around a new product enables higher prices to be charged, which can increase profits

• Lack of competition also allows maximum prices to be charged

Price skimming disadvantages

• High initial prices can put off some customers

• Technique results in low initial sale numbers

Penetration pricing advantages

• Encourages new customers to try a product

• The business hopes to gain repeat custom once the price rises

Penetration pricing disadvantages

• Very little profit can be generated during the initial low price period

• Could result in a price war if competitors set prices lower too

Destroyer/predatory pricing advantages

• Competitors are forced out of the market, then prices can rise again

• Increases market share

Destroyer/predatory pricing disadvantages

• can only be used by larger companies that can afford to make losses while prices are low

• this illegal practice could breach the CMA’s anti-competition regulations

Price discrimination advantages

• encourages customers to try a new product

• allows for high profit margins on some price brackets

Price discrimination disadvantages

• Harder to budget for sales revenue in advance

• Loss in potential revenue from selling at a cheaper price

Loss leaders advantages

• creates greater footfall, i.e. brings customers to the market

• Hopefully customers will buy normal-priced products while buying loss leaders

• Encourages repeat purchases

Loss leaders disadvantages

• There is a risk that some people will only buy the loss leaders, impacting on profits

psychological pricing advantages

• makes the customer think that the product is cheaper than it actually is

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psychological pricing disadvantages

• calculating total money owed or giving change can be difficult

• some customers may ignore the attempt at making the product seem cheaper so the rest of the marketing mix would have to convince them to purchase