1.3.3 pricing strategies

cost plus

• when a percentage mark up is added to the cost of producing a good/service to calculate the selling price

• total cost per unit (variable & fixed costs per unit) + % mark up

• adv: covers cost of production

• disadv: could be pried too high (unless niche), doesnt guarantee a net profit (might not sell all stock so end up making a loss anyway)

price skimming

• setting higher initial price for a new product in order to recoup costs

• higher price targets a specific market (early adopter) and once this market has been skimmed off they lower price

• adv: covers research and development costs quickly

• disadv: if known for price skimming customers may wait for price to decrease

penetration pricing

• setting a low initial price in order to get a foothold in the market and gain market share

• price is raised once product has customerbase

• likely to be used with price elastic products to gain the revenue they need to reduce the price

• adv: low price attracts more customers

• disadv: customers may not remain loyal once price increases, low price may have an effect on profit in the long run

predatory pricing

• when prices are set low for a short period to force competitors out the market

• adv: drive out competition, more market share

• disadv: illegal so could get fined/penalties

competitive pricing

• prices are based on the prices charged by competitiors

• adv: take market share from rivals

• disadv: will reduce profit margins per unit

psychological pricing

• when a firm sets a price for the product in order to entice the customer into making a purchase by making it sound cheaper than it actually is

• adv: makes customers feel like its less money

• disadv: wont work on everyone

factors that influences on pricing strategy

• cost of production

• unique selling point/differentiation

• price elasticity of demand

• number of competitiors

• target market

• stage in the product life cycle

• brand image