Chapter 13

Pricing reinforces brand image - high prices > higher quality

Pricing Strategies
  • To break into new markets
  • To increase market share
  • To increase profits
  • To make sure all costs are covered & target profit is earned
Cost-plus pricing
  • Cost of manufacturing the product plus a profit mark-up
  • Advantages   * Easy to apply   * Different profit mark-ups could be used in different markets   * Each product earns profit for the business
  • Disadvantages   * Could lose sales if selling price is higher than competitors   * Total profit only made if sufficient products sold   * No incentive to reduce costs - higher costs would be passed on to customer (higher selling price)
Competitive Pricing
  • When the product is priced in line with or just below competitors’ prices ,to capture more of the market
  • Used to maintain market shares
  • Advantages:   * Sales are likely to be high - price is at realistic level (not under/over priced)   * Avoids price competition - reduce profits for all businesses in market   * Used when its difficult to tell difference between products of different businesses - more oppurtunity for sales
  • Disadvantages:   * If costs of production higher than competitors - may lead to losses being made (less profit)   * Higher quality products may need to be sold at higher prices - higher quality image   * Time-consuming & expensive - need detailed research on competitors prices
Penetration Pricing
  • When prices are set lower than competitors’, to enter a new market
  • Advantages:   * Used for newly launched products to create impact on customers   * Ensures sales are made - able to enter market   * Market share could build up quickly
  • Disadvantages:   * Low prices mean profits could be low   * Customers might ‘get used’ to low prices - reject product if price were to increase   * Might not be appropriate for branded products - with reputation for quality
Price Skimming
  • High price set for a new product on the market
  • People would be willing to pay for a new product
  • Costs of research & development need to be covered
  • Advantages:   * Establish product as good quality   * High research & development costs can be covered with high profits   * With unique products, high price will lead to profits being made before competitors launch similiar products - after need to reduce price
  • Disadvantages:   * High price may discourage potential customers from buying   * High price & profits may encourage more competitors to enter the market
Promotional Pricing
  • Product sold at very low price for a short period of time
  • Encourage customers to buy
  • Advantages:   * Useful to get rid of unwanted inventory which wont sell   * Help to renew interest in a product if sales are falling
  • Disadvantages:   * Revenue would be lower - price lowered   * Lead to price competition with competitors - might have to reduce price again

Psychological Impacts

  • High price for high-quality product - high-income customers would buy for status
  • Price set just below a whole number may give impression of it being much cheaper
  • Low prices for products given on a regular basis - gives impression of being given good value for money
  • Repeat sales made when price reinforces consumer’s perceptions
Dynamic Pricing
  • When businesses change prices depending on the level of demand
  • Changed based on ability to pay or availability of product
  • Increased demand = price increases , vice versa
  • Consumers would be willing to pay high prices when demand is high
  • High-income = charged higher (online tracking history)

\ Price Elastic Demand

  • Where consumers are very sensitive to changes in price
  • Many substitutes available
  • Not good to raise price - consumers could switch to competitors

Price Inelastic Demand

  • Where consumers are not sensitive to changes in price
  • Not many substitutes

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