4.5 price the four P

Pricing strategies

1. Cost-plus (mark up) pricing

2. Penetration pricing

3. The loss leader

4. Predatory pricing

5. Premium pricing (niche inky)

1-4: mass market

Cost plus pricing definition

Involves adding a percentage of profit (mark up) to the cost per unit of output to determine the selling price

Selling price over cost plus pricing formula

Cost per unit + mark up (profit that a firm wishes to gain for every product it sells)

Advantages of cost plus pricing

1. Simple and easy to calculate

2. Ensures business covers its production cost and make profits

3. Important and relevant in markets where raw material costs are rising

Disadvantages of cost plus pricing

1. Fails to consider market needs and potential level of demand when setting prices ( only care about profit)

2. Does not take into account competitive conditions (competitions pricing not considered=selling price higher than competitors could cause lost of sales)

3. Give firms few incentive to reduce costs (only can reduce COP like quality)

Penetration pricing definition

Involves setting a low initial price for a product with the aim of attracting a large number of customers quickly and gaining a high market share . As firms gains market share , it can start to raise prices slowly

• for new business in the market

• During decline introduce this strategy

• Best for mass market

Advantages of penetration pricing

1. Consumers are encouraged to buy the products when price is low = higher sales volume and market share for new products

2. Lower prices = competitive advantages

3. Discourage potential new competitors from, entering the market ( low prices means profit margins are low , competitors find it hard to survive)

4. Force the business to focus on cutting costs ( reduce waste, better /improved processes) raising productivity and improving efficiency to be able to charge low prices (when there is high demand)

Disadvantages of penetration pricing

1. High sales volume may not lead to high profits especially due to low prices

2. Low quality associated with low prices

3. Customers may expect low prices , making it difficult to raise prices in long run (lose customers and market share)

4. Cost increases suddenly due to inflation , firm could be operating at a loss

The loss leader definition

Involves setting the price of a good or service below cost of production in order to attract customers to buy the product along with higher profit margins

• main good : normal price (water bottle)

• Accessory good : lower price (water bottle holder)

The loss leader advantages

1. Attract many customers =higher overall profits

2. Gain customer loyalty as people like bargains

3. An effective way to get rid of old stock

4. Used as a brand switching strategy (low prices attract customers away from competitors)

Disadvantages of the loss leader

1. Low pricing strategies = accused by competitions of undercutting them / unfair business practices (face investigations/damage to reputation business looks unethical)

2. Customers become used to loss leader products = unsustainable in LR when trying to make profits / EOS

3. Customers expect loss leader products= expensive for business to sustain

4. Running at a loss yet no guarantee that customers will buy other products with positive profit margins

Predatory pricing definition

Involves charging prices lower than competitors, even below COP,with the ai, of driving competitors out of the market to restrict competition

• larger market share in LR

• Short run strategy

Advantages of predatory pricing

1. Lower prices = competitions customers attracted

2. Sales revenue increase if consumers are price sensitive

3. Reduce number of competitors in the long term , increase the monopoly power of the predator

Disadvantages of predatory pricing

1. Encourage competitors to retaliate , price wars

2. Not sustainable pricing strategy as firms cannot afford to keep reducing prices

3. Lower prices = doubt quality

4. Anti-competitive , illegal in many countries + violate competitive laws

Premium pricing

Involves a business permanently setting high price for its products because of the associated image , reputation or status associated with its high quality products

Premium pricing advantages

1. Generates high profit margin

2. Create higher barriers to entry for competitors if it can establish a loyal customer base

niche market large investments needed to enter

Disadvantages of premium pricing

1. Limit number of customer because of hub prices

2. Requires strong brand loyalty , expensive to establish and maintain (investment for promotion / high quality ) ,convince customers price is worth