Competing on price

Cost plus

1. When firms try to calculate how much a product should be sold for, to essentially calculate its profit, and if it will cover all costs

2. Done by adding a fixed percentage markup (profit) to the unit cost of a product, calculating its selling price (e.g pizza cost 4 pound, 50 percent markup, 6 pound at retail)

3. Flaw is that it ignores demand curve.

   
   

Price skimming

1. Short term pricing strategy, commonly used when a new product is launched.

2. It’s when the product has little to no competition so a high price is set temporarily before competitors enter the market. Its only short term because high profit earned in a market incentives other firms to join increasing competition

Penetration

1. Setting a low price initially, which is below the international price, in order to attract more customers.

2. It aims to encourage customers to switch since price is low, and once loyalty is gained the price is increased.

Predatory

1. Setting prices initially low, (below average costs) so customers change to your lower price substitute, this drives out firms in the market as they will have less sales.

2. This in the short run leads to making losses, but as firms leave they gradually increase price. Slowly gaining revenue

3. Flaw is that it’s illegal under UK law, because it anti-competitively destroys market choice

Competitive Pricing

1. When prices are set based on prices of competitors, it’s used when products are similar

Psychological Pricing

1. Usage of emotional and not rational reactions to determine price of a good

2. For example, a good might be priced at 99p rather than £1, since the 99p price tag seems a lot cheaper than the £1 price tag, even though there is only a penny difference. Therefore, consumers might be more inclined to purchase the good.

Factors that determine appropriate pricing strategies in a particular situation:

Number of USPs (Product Differentiation)

1. If a product is niche or premium, then the firm is more inclined to put a higher price

2. If there is several similar goods in a market, prices are likely to be lower since firms will be able to differentiate on price, rather than characteristics of the product

Factors that determine appropriate pricing strategies in a particular situation:

Price elasticity of Demand

1. A product with low PED is not very responsive to a change in price so more likely to have high price (e.g medicine)

2. A product with high PED is very responsive to change in price, so is more lower in price, since quantity sold is dependent on price

Factors that determine appropriate pricing strategies in a particular situation:

Stage in product life cycle

1. When a product has newly been launched, a firm might use penetration pricing if there is high competition in market.

2. Or if no competition, price skimming, to squeeze profit margins as much as possible

3. During growth and maturity, the price is more likely to be competitive, to determine what product a customer is going to buy

4. During decline, price is set lower to sell off remaining stock