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Cost-Plus (Mark-Up) Pricing
Definition: • Fixed percentage (mark-up) + Production cost = Selling Price
Advantages ✅ [consistent, simple to implement] • Price stability: consistent pricing • Simple to implement • Eliminates need for market research (just need to know production cost and mark-up percentage) • Stable profit margins
Disadvantages ❌ [ignores demand and competition, not flexible] • Ignores demand and competition • Risks inefficiency • Less Flexible, hard to adjust prices • Not competitive in saturated markets • Doesn't reflect customer value • Affected by inflation
Example: • $50 production cost + 50% mark-up = $75 selling price
Penetration Pricing
Definition: • Low initial price • Aims to attract customers quickly • Gain high market share!
Advantages ✅ • Low price = encouraged consumers • High sales volume and market share • Increases stock turnover
Disadvantages ❌ • High sales volume doesn't always mean achieving high profits • Customers may perceive the product to be low quality • Only suitable for price-sensitive markets (price increase may lose potential customers)
Example: • IKEA in China
Loss Leader
Definition: • Product is sold at a lower price than its cost • Market entry • ↑ Market share
Advantages ✅ • ↑ buyer attraction • Encourage people to explore other high-margin products • Boost sales
Disadvantages ❌ • Risk of losses (profits may drop if customers only buy discounts) • Not suitable in the long-term (can hurt profitability)
Example: • McDonalds $1 menu
Predatory Pricing
Definition: • Low price to drive competitors out of the market • Creates barrier of entry for new competitors • DESTROY ALL COMPETITION!
Advantages ✅ • Gain a dominant position in market • Minimized competition • New entrants are deterred from entering (cuts out potential competition)
Disadvantages ❌ • Illegal in many countries (anti-competitive behavior) • Difficult to sustain in the long-term
Premium Pricing
Definition: • Sustains high price • Impression of quality
Advantages ✅ • Customers perceive the products as quality • ↑ profit margin • ↑ brand value • ↑ social status
Disadvantages ❌ • ↑ marketing cost • Can't implement for all product types • Misses price-conscious consumers
Examples: • Apple • Gucci • Rolex
