1.3.3 Pricing Stategies Flashcards
What is price?
The amount of money (capital) that the customer had to pass to receive the good or service
What are the pricing strategies
- Cost plus pricing
- Competitive pricing
- Price skimming
- Penetration pricing
- Predatory pricing
- Psychological pricing
- Premium pricing
- Promotional pricing
What is cost plus pricing?
The cost to produce the products are worked out then money is added on top.
2 ways of doing this
- add profit margin in £
- add a % markup on-top of the cost of making the product
Eg coffee, branded clothing
Advantages of cost plus pricing
- Maximise profit margin
- Reach break even point quicker
- Simple to understand
Disadvantage of cost-plus pricing
- If prices are too high, demand (PED) may fall for inelastic goods
- Can be complex to monitor
- Ignore value generation
What is competitive pricing?
Some products or services are priced in lines it’s rivals
Means that customer will have to judge a product or service on “non-price” methods such as quality of service or speed
Benefit of competitive pricing
Allows business to build loyalty
Disadvantage of competitive pricing
Increase cost to offer better option
What is price skimming?
A product is price high to begin with as it has desirability factor (novelty) that will mean customers will want it when it is new
Benefits of price skimming
- Spreads positive word of mouth
2. High in demand- can charge high prices
Disadvantages of price skimming
- Sales falls overtime
2. Spends on R&D
What is penetration pricing?
Setting up prices really low on a new product to encourage sales and to persuade the customers to try the product.
Benefits of penetration pricing
- Increased revenue
2. Builds loyalty
Drawbacks to penetration pricing
- Perception of lower quality item
- Making less profit per item sold
- More power to consumers as they choose based on ‘non- price’ factors
What is predatory pricing?
Existing businesses my hold off the threat of a new entrant by lowering their prices so that any competitors cannot make profit
Benefits of predatory pricing
- Very high revenue
2. Gives competitive advantage
Negatives of predatory pricing
- Limited to no profit margin
2. Sells more product to break-even- high breakeven point
What is psychological pricing?
Pricing a product just below a whole round number to appear cheaper and giving the customer more value for their money
Benefits of psychological pricing
- Works well in mass market goods with lots of competition
2. Increase sales
Drawbacks of psychological pricing
- Losing capital- making a loss per item
2. Perception of lower quality item
What is premium pricing?
Pricing a product at a high price due to its perceived level of quality attached to product/service
Benefits of premium pricing
- High profit margins
- Increases brand product value
- Lower breakeven point
Drawbacks of premium pricing
- Limited target market
2. Production cost will be higher
What is promotional pricing?
Using incentives/sales promotions to encourage short term level of sales
