PRICING STRATEGIES

pricing strategy is part of the marketing strategy of a business

pricing strategies are important as they directly affect the amount of profit made , usually the price is set in mind ensuring that costs are covered and profit is made. it helps the business achieve its marketing and corporate objectives.

• some prices can be used for new products in the market such as price skimming or penetration pricing

• whereas some strategies are more suitable for existing products

DIFFERENT TYPES OF PRICING STRATEGIES :

• cost plus pricing ; this strategy ensures that all costs are covered because the price of the product is set in a way that it ensures the cost of producing it is covered for. it involves adding a markup ( the amount added to the cost price of goods to cover overheads and profit ) to the unit cost ( average cost . total cost / output ) however , the markup used may be too high compared to rivals so they may lose out on sales since customers may be unwilling to pay, another problem may be the difficulty in identifying the costs

  adding a percentage ( mark - up ) to the costs of producing a product to get the price

  formula = unit cost + ( unit cost x markup )

  - commonly used by manufacturers of standard products

• price skimming ; another name for this is also ‘creaming’. the aim of this strategy is to generate high levels of revenue with new product before competitors arrive so the market can be exploited. this is commonly used for new products or technological products , this may be because customers may be willing to pay higher prices for unique products. however , when the patent runs out , competition will arise so using this strategy wont be wise as customers will then have more options. this helps to cover costs of innovation initially and then gain more customers

  setting a high price for the initial launch of a product and then lowering it overtime

• penetration pricing ; the low price is usually kept for a limited amount of time. the idea of this is to help develop a secure initial position in the market from where the business can make further progress. this is used in hopes that customer will buy the product when the price is low and be satisfied enough to repurchase them when the price rises again. it is beneficial when the product is aimed towards middle income or low income consumers. it helps to grow the sales of a product quickly as the price is low enough to attract customers from rivals. however , as a result , they may find it difficult to cover the costs that they incurred in the process of launching the product and chances are customers will stop buying when prices are increased

• predatory pricing ; it is also known as destroyer pricing. this is done in an attempt to eliminate competitors from the market , so the prices are set very low until satisfactory numbers of competitors have left the market. this is done by selling a product below the cost of production. after competitors have left the market , the prices can be raised again. this can be used if low cost businesses are prepared to have low profit margin for a long time. it may be particularly useful when a business is trying to sell off products that would have been otherwise gone to waste , so this prevents products going to waste. however , in some places it may be illegal and may also make it difficult for a business to survive initially if they dont sell enough products

• competitive pricing ; some businesses charge prices similar to what rivals are charging, this is likely to be used by business that operate in a fiercely competitive market as it helps them not over-charge customers or under-charge them. this helps avoid price wars , and is generally considered as a safe pricing strategy as it helps attract customers. it also encourages businesses to operate efficiently so they dont fall behind and dont have to go out of business. however this causes limited differentiation so businesses will have to attract customers using better value for money such as better quality of products

• psychological pricing ; this involves setting prices slightly below a rounded figure like $99.99 instead of $100 this helps attract customers who are trying to be cost conscious and save money , although there isnt much of a difference , thus this is basically tricking customers into believing the price is lower than it actually is. as a result , this increases sales. this pricing is also versatile and effective in various industries and product categories. however , while this may work on many consumers , the rational ones wouldnt fall for it. furthermore , how much of a product is bought also depends on other factors besides pricing

  psychological pricing involves tactics that are designed to appeal to a customers emotional response to price by setting the price slightly below a rounded figure

• loss leader pricing ; the low price for a certain product attracts customers who will buy products that are meant to make a profit so the business can increase the sales for the business. this can also be used to clear excess inventory which have been sitting unsold , this way the products can be sold off before they become obsolete. however , if customers dont purchase other products the business will suffer from lower revenue and this is unsustainable on the long run as continuously using this strategy will harm the businesses finance.

FACTORS THAT AFFECT PRICING STRATEGIES :

• differentiation and USP ; a business can generally charge higher prices for a product if it has a USP or is highly differentiated from rivals

• price elasticity of demand ; if the ped of a product is price inelastic , charging higher prices will result in higher revenue and if its price elastic , higher prices will result in a fall in demand. usually utility companies such as gas or electricity are easily able to increase price without losing out on sales

• the level of competition ; if there are a lot of rivals in the market it will be harder to charge higher prices without losing sales as customers can switch to a different supplier who has more affordable prices. on the other hand if there arent many competitors , the business can get away with charging higher prices

• strength of the brand ; a business with a strong brand image can generally charge higher prices without much problem as they tend to have loyal customers who will repurchase

• stage of product life cycle ; products may go through different pricing strategies as they go through the product life cycle. In the introduction stage, prices may be set lower to attract customers and build market share

  In the growth stage, prices can increase as demand for the product increases.

  In the maturity stage, prices may need to be lowered again

• costs and the need to make a profit ; in the long term it becomes necessary for a product to cover the costs so that the business can make a profit. Prices must cover the cost of production and provide a reasonable profit margin