Business - Pricing Strategies

Pricing Strategies

Penetration Pricing

• This is where a business tries to increase market share by offering a low initial price

• This can increase the market share as a business can attract customers from established competitors

• However, this can lower short-term profits but market share may be more important for the long-term profitability of a business

Advantages

• Customers are attracted to buy the product at a low price leading to high sales volume and market share

• Competitors unable to match or beat the low price are forced out the market leading to less competition

Disadvantages

• Customers may perceive that the product is of low quality if it is sold at a low price

• This also limits the amount of profit made

Loss Leaders

• These are products or services that are sold by a business at a price where the business makes a loss

• Loss leaders can attract new customers or sell to existing customers, in the hope that they make extra purchases

Advantages

• By increasing the footfall in your store loss leader pricing boosts overall sales which then cover the loss from lower priced items

• A business can sell old or outdated stock

• This could attract new customers as window promotions displaying discounted offers may entice anew customers to come into your store and word of mouth about the low prices could also bring in local customers

Disadvantages

• A big disadvantage would be if the store does not attract new customers or stimulate sales of full-priced items which will result in a reduced margin

• A customer’s perception of the quality of an item may be influenced by the price as if it is too low it may raise the concern of low quality, out-of-date, or damaged goods

• Customer shopping behaviours could be formed if there is an expectation for discounted deals which could lead to cherry picking, whereby customers solely purchase loss leaders and will shop in several places to find the items they need

Competitive Pricing

• This is when a business sets its prices for its products and services based on what other firms in the market are charging

• Competitive pricing is used when the products in a market are similar

• The petrol sold at petrol stations is usually based on competitive prices

Advantages

• This is effective when a business is in a highly competitive market and wants to maintain its market share

Disadvantages

• The business must continually monitor its competitors prices and adjust its prices accordingly to remain competitive

Cost-Plus Pricing

• A pricing strategy where a business charges the customer based on what it costs to produce the product or service

• They work out exactly what it costs to produce the product on an average and then add a ‘mark-up’ on top of this cost to make sure that the business makes a gross profit

• For example, if Kwik Fit bought a Dunlop tyre from its suppliers for £80, then if they added a 25% mark-up, then the tyre would be sold to customers for £100

Advantages

• A simple and quick method of calculating a price for a product

• It ensures that a profit is made on each item sold

Disadvantages

• It does not consider the needs of the market

• The pricing approach of competitors is ignored