4.5 Further Pricing Strategies

Dynamic pricing

a pricing strategy where the same product or service is sold to different customers at different prices, based on factors like customer group, time, demand, or competitor prices.

Competitive pricing

a pricing strategy where a business sets its prices at the same or similar level as its competitors, based on the idea that these prices reflect market expectations. It helps new or existing firms attract customers by signalling comparable quality.

Contribution pricing

a strategy where the selling price is set above the direct cost of production, and the difference helps cover fixed costs. Each unit sold contributes to paying off the business’s overall fixed costs before profit is made.

Dynamic Pricing Pros

Higher profit and sales

Adjusting to the competition

Flexibility

Better inventory management

Dynamic Pricing Cons

Customer dissatisfaction leading to loss of sales

Not applicable to all markets

Competitive Pricing Pros

Builds customer trust and price fairness perception
Aligned with rivals

Competitive Pricing Cons

Limits differentiation and brand identity
Pricing is not low enough to attract customers.

Contribution Pricing Pros

Covers Variable Costs First

Useful for Short-Term Decision-Making

Flexible

Contribution Pricing Cons

Difficult to classify the costs as direct and indirect
Ignores market demand and competitor pricing

Price Elasticity of Demand (PED)

measures how much the quantity demanded of a product changes in response to a change in its price.

Price Elasticity of Demand (PED) Formula

PED = (% change in quantity demanded) ÷ (% change in price)

Elastic Demand

a small change in price causes a larger change in quantity demanded.

Inelastic Demand

a change in price causes a smaller change in quantity demanded.

PED > 1

Elastic

PED < 1

Inelastic

PED = 1

Unit Elastic

PED = 0 or ∞

Perfectly Inelastic

Factors affecting PED

Availability of Substitutes

Necessity vs Luxury

Portion of Income

Time Period

Brand Loyalty