1.3.3 Prcing Strategies Flashcards
What is price
Is the amount is money that the customer has to pay to receive and good or service
Price strategies include
Cost plus
- price skimming
- penetration
- predatory
- competitive
- psychological
- discrimination
Describe cost plus
Is when a percentage mark up is added to the cost is producing a good or service to calculate the selling price
Variable cost per unit + a proportion of total cost + a percentage mark up
•The percentage mark up is how much the business wants to achieve as profit
Describe price skimming
●Price skimming involves setting a high initial price for a new product in order to recoup costs
●When a firm releases a new product it often charges a high price targeting a segment of the market known as ‘early adopters’
●These are customers who must have the product as soon as it is launched and are prepared to pay high prices to get it
●Firms often base their initial promotional campaign around this idea, trying to create a ‘must have’ mentality amongst their target market
●Once this market has been ‘skimmed off’ the company will lower price
Describe penetration pricing
●Price penetration involves setting a low initial price for a new product in order to get a foothold in the market and gain market share
●May be a suitable pricing strategy for a product in a mass market
●A firm will release a new product at a low price with the aim of enticing people to buy
●The aim is to gain an early customer base
●Once the product has been launched and built up a customer base the firm may raise the price
●Likely to be used with a price elastic product
What is predatory pricing
- Predatory pricing is when prices are set low for a short period of time to force competitors out of the market
- Prices are then put back to where they were previously or even higher
- This strategy is used by dominant businesses, who can afford to make a loss in the short run, to force new entrants out of the market
Describe competitive pricing
•Prices are based on the prices charged by competitors, maybe the same or slightly lower, firms will try to compete on other aspects of the marketing mix
What is discrimination pricing
Changing the prices between the time of day
What are price leaders
Firms that dominate a market with an existing product set the price and other firms in the market follow suit.
It is illegal for firms to get together to set prices in order to increase the total value of the market.
Smaller firms will sometimes look to the largest firm in the market to set the price and then follow this price lead. If the smaller firm were to lower their price below that set by the price leader it might start a price war that it has no hope of winning.
What are price takers
Smaller firms in the market who set their prices based on the market price. This might be the price set by the market leader or it might be in a very competitive market where firms sell similar products and customers find it hard to differentiate the product.
If the small firm were to lower price in order to increase market share all other firms would have to follow suit and the customer, rather than the firm, would benefit from lower prices.
A price leader is likely to respond to a smaller firm cutting prices by cutting prices themselves. The small firm would be unlikely to do this because it would retain the same market share but at a lower selling price.
What is psychological pricing
●Psychological pricing occurs when a firm sets a price for the product in order to entice the customer into making a purchase by making it sound cheaper than it actually is
●A common example of psychological pricing is when a firm charges £9.99 rather than £10.00
What factors determine choice of pricing
- Number of USP /differentiation
- price elasticity of demand
- level of competition in the business environment
- strength of brand
- stage in product life cycle
- costs and needs to make a profit
Describe how the number of USP affect the choice of pricing strategies
- The more differentiated a product the greater the ability to charge higher prices as customers will pay more for the unique features of the product
- A new product entering the market that is highly differentiated might use a strategy of price skimming
Describe how price elasticity of demand determines choice of pricing
•If customers are sensitive to changes in price i.e. the product is price elastic then a business might keep prices similar to competitors
Describe how the level of competition in the business environment will determine the choice of pricing
If the market is dominated by a few large firms businesses will follow a strategy of competitive pricing
