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