4.5.2: Price

Price

 the amount paid by a customer to purchase a good or service.

5 pricing methods

1. Cost-plus {mark-up} pricing 

2. Penetration pricing 

3. Loss leader Pricing

4. Predatory Pricing

5. Premium pricing 

1. Cost-plus {mark-up} pricing 

• Markup: Adding a percentage or predetermined amount of contribution to the cost per unit of output to determine the selling price

  • Also known as a profit margin 

• Advantage: Simple calculation

• Disadvantage: Too much intuitive decision making involved 

Penetration pricing

• involves setting a low price in order to enter an industry

• Advantage: makes it competitive 

  • High number of customers in a short amount of time 

  • Suitable for mass market products 

  • Bulk sells to sustain the low profit margin

Loss leader Pricing

• selling a good or service below its cost value

• Retailers will use this to attract customers to the whole shop 

• Encourages brand switching 

Predatory Pricing

• Temporarily reducing price in an attempt to force competitors out of the industry as they cannot compete in a profitable way

• Price war

Price war

• Where these pricing strategies stem from, competitors continuously bringing prices down to attract customers

Premium pricing

• When the price of a good or service is set significantly higher than similar competing products 

  • Normally the product is higher quality or unique enough to justify the price

 Non-pricing strategies

• These strategies can take the form of promotional methods such as advertising, gifts, loyalty programs etc…

Affecting a firm's pricing choice

1. Nature of the business 

2. Nature of barriers to entry 

3. Business images

4. Cost

5. State of the economy 

Dynamic Pricing

• varying the price of a good or service to reflect changing market demand, such as during different times of the day or year

Contribution pricing

Setting the selling price of a product higher than the direct costs of production per unit in order to ensure there is a positive contribution made towards payment of indirect costs.