1.3 Pricing Stratergies Flashcards
How does cost plus work
The business adds a markup on top of the cost to produce
Benefits of cost-plus pricing?
Simple
Always making a profit on a sale
Price increased can be justified when costs rise
Drawbacks of cost-plus pricing?
Doesn’t consider competition or customers
Less incentive to control costs
Ignores PED
When is cost plus used?
For struggling firms, small businesses and retailers
What is price skimming
Having a high initial price and then lowering it over time
When is price skimming used?
For new products
Advantages of price skimming?
High initial costs can help cover R+D costs
Gives perception of high quality
Reaches everyone budget eventually
Disadvantages of price skimming?
High prices can be hard when competitors launch alternatives
Can lower initial sales
Must invest in a must have mentality
What is penetration pricing?
Starting low to gain market share a customer loyalty before potentially increasing prices.
When is penetration pricing used
When entering a new market.
Benefits of penetration pricing?
High initial sales volume
Can act as a barrier to other competitors
Drawbacks of penetration pricing?
Can give perception of low quality
Can make it hard to increase prices
What is predatory pricing?
When a firm sets their prices very low to eliminate competition.
When is predatory pricing used?
When a big firm with strong finances wants to eliminate competition.
Advantages of predatory pricing?
Creates a barrier to entry
Reduce competition
Disadvantages of predatory prcing?
Illegal
May not be a viable long-term strategy
What is competitive pricing?
Setting prices based on competitors
When is competitive pricing used?
In competitive markets.
Advantages of competitive pricing?
Price won’t be a competitive disadvantage
Can increase prices with competitors
Has to compete with a USP
Disadvantages of competitive pricing
Customers feel manipulated by the lack of choice
May not appeal to customers who make rational purchases
What is psychological pricing?
Uses emotions rather than rational responses to get sales, e.g. 9.99 is cheaper than 10 pounds.
Advantages of psychological pricing
Easy to implement
Changes perceptions without changing the product
Barely effects profits
Disadvantages of psychological pricing
Customers may feel manipulated
May not appeal to rational customers
What is a price leader?
Firms that dominate a market and set the prices
It is illegal for firms to get together and set the prices.
What is a price war?
Where 2 firms keep lowering their prices big firm normally wins
What is a price taker?
Smaller firms who follow the market price
