Pricing Strategies: Pros and Cons

Price skimming

Pros:

• Word of mouth advertising

• Higher upfront sales figures

• Easier to segment customer base

• Creates perception of high quality products

• Increases customer loyalty

Cons:

• Only works with inelastic demand curve

• Consumers may be put off by price change

• Doesn’t work if competitors are doing the same

• Likely to fail

• Quality must justify price

Price penetration

Pros:

• Encourage people to try product, creating brand loyalty

• Become market lead

• Potentially benefit from economies of scale

Cons:

• Not a lot of profit

• High risk

• Significant upfront investment

• Unrealistic pricing expectations

• Creates impression that product/brand is low quality

Competitive pricing

Pros:

• Easy

• Low risk

• Cost effective

• Can be combined with another technique

Cons:

• Not market-driven

• Can lose potential profits

• Product doesn’t stand out

Predatory pricing

Pros:

• Eliminates competition

• Restricts new entrants

Cons:

• Illegal - violates antitrust laws as its goal is to create a monopoly

• Difficult to survive

• Questionable legitimacy

Cost-plus pricing

Pros:

• Easy to calculate

• Sustainable

Cons;

• Complicated if you want to apply different margins to different products

• Doesn’t focus on profit maximisations

• May not reflect product’s true value

• Doesn’t always reflect market conditions

Psychological pricing

Pros:

• Gives illusion that the product is cheaper

• Marketing tool

• Simplifies decision making

• Encourages research

Cons:

• Relies on demand

• Risk loss of trust

• Unsustainable expectations

• Loses effectiveness in global markets - exchange rates, different currencies