Pricing Strategies Overview - IAL (Edexcel) Unit 1

Pricing Strategies

• A set of plans about pricing, part of the 4Ps of the marketing mix.

• Helps a business achieve its marketing objectives.

Factors Influencing Pricing Decisions

• Product-Specific Factors:

  • Distance traveled (e.g., transportation services)

  • Mass (weight)

  • Local government regulations/pricing controls

  • Brand perception and strength (luxury vs. budget)

  • Design and quality of product

  • Sourcing of materials

• Market and Competitive Factors:

  • Competitor pricing

  • Market segment targeted (niche vs. mass)

  • Availability of drivers (e.g., ride-sharing services)

• Dynamic Factors:

  • Weather conditions

  • Time of day

• Strategic Considerations:

  • Luxury packaging to justify higher prices

  • Smoothing out production and demand through price variations

  • Recession-sensitive pricing

  • Sponsorships to attract new customers

Determinants and Objectives of Setting a Price

• Dependence On:

  • Overall marketing mix

  • Brand strength

  • Number of competitors

  • Target market segment

• Reasons For Setting Prices:

  • Breaking into a new market

  • Increasing profits

  • Increasing market share

  • Covering costs

Pricing Methods

Cost-Plus Pricing

• Definition: Setting a price based on the cost of making a product plus a profit mark-up. This ensures costs are covered and a profit is made.

Benefits:

• Guarantees a profit.

Limitations:

• May not be competitive; doesn't consider market demand.

• Usage: Typically used where costs are easily calculated and competition is limited.

• Doesn't account for market prices or competition.

Competitive Pricing

• Setting a price in line with or just below competitors' prices to capture more of the market.

Benefits:

• Can attract customers in competitive markets.

Limitations:

• Requires constant monitoring of competitors' prices; may lead to price wars.

• Suitable Situations:

  • Markets with established prices.

  • To beat competitors.

Penetration Pricing

• Definition: Setting a price lower than competitors' prices for a short period to enter and establish a product in a new market.

• Intention: To get consumers used to the product, so they continue buying even when prices rise.

• Benefits:

  • Attracts new customers.

  • Builds market share.

  • Can become dominant in the industry.

• Limitations:

  • Competitors may lower prices in response.

  • High risk of losses.

  • Customers may leave once prices increase.

  • High risk, could cause high losses.

Price-Skimming

• Setting a high price for a new product entering the market for a limited time to boost profits and recoup development costs.

• Intention: To generate high revenues before competitors arrive or to exploit a product's popularity while it is unique.

Benefits:

• Initial high profits.

Limitations:

• Only works when customers are willing to pay a premium.

• High price may deter some customers.

• Requires strong brand image and customer loyalty.

Predatory Pricing (Destroyer Pricing)

• Setting a very low price (even below cost) to eliminate competitors in the market.

• Ethical/Legal Issues: May be illegal in some countries due to reduced competition.

Benefits:

• Can wipe out competitors.

Limitations:

• Can be fined by the government.

• Destroys brand image.

Psychological Pricing

• Setting a price that 'tricks' the consumer into thinking they are getting a good deal (e.g., 199 instead of 200).

• Effectiveness: Works best for bargain hunters; less effective for premium products.

Benefits:

• Can increase sales.

Limitations:

• May not appeal to all customers.

Which Pricing Strategy to Use?

• New Soap Powder Brand (Many Competitors Around 400bt): Competitive pricing.

• Newspaper Launching Online Version (Existing Competitors): Competitive pricing or penetration pricing.

• Bespoke Furniture Maker (Unique Gold-Studded Sofa): Price skimming or cost-plus pricing.

• Apple Launching a New iPad: Price skimming.

• H&M Selling Out-of-Fashion Dresses: Psychological pricing (discounted prices).

• Car Retailer Selling Latest Car Model for $12,999: Psychological pricing.

• Amazon sets up in Thailand & offers free next day delivery: Predatory Pricing

Price Elasticity of Demand (PED)

• Price Elastic Demand: Consumers are very sensitive to price changes (lots of substitutes).

• Price Inelastic Demand: Consumers are not sensitive to price changes (few substitutes).

• Revenue Maximization:

  • Price elastic demand: Lower prices to increase revenue.

  • Price inelastic demand: Increase prices to increase revenue.

  • When writing counter arguments

Factors to Consider When Choosing a Pricing Strategy

• Differentiation & USP (Unique Selling Proposition)

• PED (Price Elasticity of Demand)

• Amount of competition

• Strength of the brand

• Stage in the product life cycle

• Costs and the need to make a profit

• Suggest a strategy, and that it will depend on PED

  • Price elastic: Lower Price

  • Price inelastic & Competitors priced: Competitive Price

  • Good brand: Higher Price

  • Price higher than cost unless doing penetration/predatory pricing

Changes in Pricing to Reflect Social Trends

• Consumers are better informed about prices due to greater access to information and new technologies.

• Online sales

• Dynamic pricing (e.g., changing flight prices based on search history).

• Auction sites (e.g., eBay).

• Personalized pricing (using cookies).

• Subscription pricing (software, magazines, TV).

• Price comparison sites.

• Price-conscious customers